Program on Science,Technology, America,and the Global Economy

New Thinking inInternational Trade:National Strategies to BuildComparative Advantage

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Program on Science,Technology,America, and

the Global Economy

Science, Technology, America, and the Global EconomyWoodrow Wilson International Center for ScholarsOne Woodrow Wilson Plaza1300 Pennsylvania Avenue, NWWashington, DC 20004-3027T 202.691.4000F [email protected]

www.wilsoncenter.org/stage

Program on Science,Technology,America, and the Global Economy

Edited by Lynn Sha and Kent H. Hughes

Stage2_cover 9/2/08 5:05 PM Page 1

New Thinking inInternational Trade:National Strategies to Build ComparativeAdvantage

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The Woodrow Wilson International Center for Scholars,established by Congress in 1968 and headquartered inWashington, D.C., is a living national memorial to PresidentWilson. The Center’s mission is to commemorate the idealsand concerns of Woodrow Wilson by providing a linkbetween the worlds of ideas and policy, while fosteringresearch, study, discussion, and collaboration among abroad spectrum of individuals concerned with policy andscholarship in national and international affairs. Supportedby public and private funds, the Center is a nonpartisan insti-tution engaged in the study of national and world affairs. Itestablishes and maintains a neutral forum for free, open,and informed dialogue. Conclusions or opinions expressedin Center publications and programs are those of theauthors and speakers and do not necessarily reflect theviews of the Center staff, fellows, trustees, advisorygroups, or any individuals or organizations that providefinancial support to the Center.

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PUBLIC MEMBERS: James H. Billington, Librarian ofCongress; Bruce Cole, Chair, National Endowment for theHumanities; Mark Dybul, Designated Appointee of thePresident from Within the Federal Government; Michael O.Leavitt, Secretary, U.S. Department of Health and HumanServices; Condoleezza Rice, Secretary, U.S. Department ofState; G. Wayne Clough, Secretary, Smithsonian Institution;Margaret Spellings, Secretary, U.S. Department ofEducation; Allen Weinstein, Archivist of the United StatesNational Archives and Records Administration

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WOODROW WILSON INTERNATIONAL CENTER FOR SCHOLARS

2008 Woodrow Wilson International Center for ScholarsWashington, D.C.www.wilsoncenter.org

Cover Illustration: © Images.com/Corbis/Keith Skeen

ISBN: 1-933549-40-8

New Thinking inInternational Trade:National Strategies to Build ComparativeAdvantage

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the Global Economy

INTRODUCTIONKent Hughes, Woodrow Wilson Center

OPENING REMARKSLee H. Hamilton, Woodrow Wilson Center

KEYNOTE ADDRESSESSenator Lamar AlexanderSenator Jeff Bingaman

PANEL I: STRATEGIES IN INDUSTRIAL COUNTRIESMark Lehrer, Suffolk UniversityMark Tilton, Purdue UniversityGary Hufbauer, Peterson Institute for International EconomicsSteven Pearlstein, The Washington Post (moderator)

PANEL II: STRATEGIES IN EMERGING MARKET COUNTRIESCarl Dahlman, Georgetown UniversityT.N. Srinivasan, Yale UniversityBryan Ritchie, Michigan State UniversityJohn Cranford, CQ Weekly (moderator)

LUNCHEON ADDRESSThe Honorable Peter Peterson

PANEL III: POLICY AND PRIVATE SECTOR IMPLICATIONSVinod Aggarwal, University of California, BerkeleySusan Butts, Dow Chemical CompanyRob Atkinson, Information Technology and Innovation FoundationRalph Gomory, Alfred P. Sloan FoundationBruce Stokes, The National Journal (moderator)

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IntroductionNational Strategies to BuildComparative Advantage by Kent Hughes

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I want to thank the Sloan Foundation for for making these conferences possi-ble and for all their past support. They have made enormous contributions overthe past decade to our understanding of innovation as well as to the whole fieldof industry studies, which had been a neglected discipline.

On November 16, 2006, the Woodrow Wilson Center held a conferenceexamining the economic strategies of advanced and emerging market countriesand their impact on the United States. This conference was the second in aseries of policy forums that highlighted new thinking in international tradetheory and policy. Its purpose was two-fold: First, to explore how the nationalpolicies of foreign competitors are designed to change their respective compar-ative advantages and thus the pattern of world trade; and second, to evaluatethe appropriate U.S. public and private sector policies for dealing with theevolving competitive strengths of other countries.

The preceeding conference in June 2006 dealt with new thinking on inter-national trade. Nobel Laureate Paul Samuelson, Sloan Foundation PresidentRalph Gomory, and New York University’s Harold Price Professor ofEntrepreneurship William Baumol focused on new global trade theories thattake into account the impact of overseas innovation on the U.S. comparativeadvantage and the potential gains from trade.

In a continuation of some of the themes from the earlier conference, SenatorsLamar Alexander and Jeff Bingaman called for increased funding for the physicalsciences, improved education in math, science, and engineering, and recruitmentof greater numbers of U.S. scientists and engineers. Their proposals drew on rec-

ommendations contained in Rising Above the Gathering Storm,1 a NationalAcademies study done in response to a joint Alexander-Bingaman request.

Former Secretary of Commerce Peter Peterson chairman of the BlackstoneGroup, warned that current and future deficits would undermine the founda-tions of the U.S. economy. He called for business and political leaders to forma high-level commission to study and make recommendations on key chal-lenges to future U.S. prosperity.

Steven Pearlstein of The Washington Post led the discussion to examineindustrial countries’ strategies for building comparative advantage. Mark Lehrerof the Sawyer Business School of Suffolk University described how Germanyhad improved mid-technology fields such as cars and machine tools but had notgenerated breakthrough discoveries. Gary Hufbauer of the Peterson Institutefor International Economics noted the importance of England’s Silicon Glenbut put more emphasis on Ireland’s successful strategy of combining a well-edu-cated populace and tax incentives to attract foreign investment.

Mark Tilton of Purdue University described Japan’s continued strength inthe automotive, machine tool, and electronics industries. Japan was also work-ing to make major changes in its university system to facilitate the kind of clos-er collaboration with industry that had yielded benefits in the United States.However, Tilton did not think that Japan would become a U.S.-like innovatorin the near future.

John Cranford of the Congressional Quarterly directed a discussion on devel-oping country strategies. China, for example, has had great success in attract-ing technology, management skills, and foreign investment, building researchuniversities, and upgrading from low-tech to more advanced products, saidCarl Dahlman of Georgetown University. India has succeeded in providingonline services that have grown from call centers to more challenging fields suchas legal research and chip design, said T.N. Srinivasan of Yale University. Indiaalso has attracted increasing amounts of R&D investment from U.S. companieswith the quality of its research talent.

2 | Kent Hughes

1. Norman R. Augustine, Chair, Rising Above the Gathering Storm: Energizing andEmploying America for a Brighter Economic Future, Committee of the NationalAcademy of Sciences, National Academy of Engineering, and Institute of Medicineof the National Academies, 2007. See http://www.nap.edu/catalog.php?record_id=12021#toc.

Several South East Asian countries have combined their own efforts with taxincentives to attract high-technology foreign investment, noted Bryan Ritchie ofMichigan State University. Singapore has moved from routine to more advancedmanufacturing. Its limited size, however, suggests that its approach may holdmore lessons for U.S. states or large cities than for the country at large.

Other speakers, such as The National Journal’s Bruce Stokes, examined howthe United States should respond to challenges from rising global competition.Vinod Aggarwal of the University of California at Berkeley, and Rob Atkinsonof the Information Technology and Innovation Foundation, warned againstbeing constrained by historical theories. Aggarwal pointed to the strategies pur-sued by emerging market countries and stressed the importance of dynamic,rather than static, comparative advantage.

Atkinson called for an economics policy focused on innovation rather thanthe traditional emphasis on efficiency or redistribution. Susan Butts of the DowChemical Company explained how the private sector was driven by marketforces to aggressively pursue opportunities overseas. Intellectual property pro-tection, while a priority, was less critical than gaining market share in countrieslike China and India.

Two challenges addressed by Ralph Gomory of the Sloan Foundation werethe record current account deficit and how to ensure that U.S. innovationstranslated into U.S. economic growth, investment, and jobs. The currentaccount deficit could be alleviated through Warren Buffett’s theory of balanc-ing trade by gradually introducing tradable import certificates to purchasers ofU.S. exports to bring the two into balance. Gomory also suggested the aggres-sive use of tax incentives linked to investment and employment.

Roundtable discussions on strengthening the U.S. economy focused onlong-term debts and deficits, the U.S. lead in innovation, turning innovationsinto high-paying U.S. jobs, the Gomory-Buffett idea of tradable import certifi-cates, sharply improved K-12 education, and the development of alternativeforms of energy.

Future paths and opportunities for the U.S. economy must be defined byexamining new thinking on international trade, analyzing changes in the glob-al economy, and searching for policies that will build the future.

Introduction | 3

Today’s conference on National Strategies to Build Comparative Advantage focus-es on how the United States should respond to the opportunities and challengesposed by the drive for Europe and Asia to become more innovative interna-tional competitors.

This conference is the second in a series that started with a look at new think-ing on comparative advantage. We will open with Senators Lamar Alexander andJeff Bingaman, two of our best leaders.

Senator Alexander and Senator Bingaman have made really an enormouscontribution to American policy thinking by asking the National Academies toform a committee that would develop policies to respond to 21st century chal-lenges. The Academies, in turn, formed a blue ribbon committee, chaired byNorman Augustine, and the result has had quite a profound impact on ournational thinking.

The president, in his 2006 State of the Union address, drew on many of theideas contained in Rising Above the Gathering Storm, also known as theAugustine Report. We’re honored and privileged to have Senators Alexanderand Bingaman here at the Wilson Center.

Opening Remarks by Lee Hamilton

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Lee Hamilton’s work with the 9/11 Commission and the Rising Above theGathering Storm report (Augustine report) illustrate one of my favorite princi-ples, which is that most ideas fail in Washington, D.C. but not because of theidea. The most unique thing about the 9/11 Commission’s report was that youcould actually read it. It was very specific and very cogent. As a result, the 9/11Commission report commanded immediate respect as an agenda for how todeal with the threat of future attacks on the United States.

The most important thing about the Augustine Report is that it took anurgent national need, the importance of keeping our brainpower advantage inthe United States, and gathered together the people who best understand theproblem, and presented in priority order, in very specific terms, an agenda forhow we must meet our need for skilled human resources. Like the 9/11Commission’s report, the Augustine Report has received enormous attentionand great support. Most of the report’s recommendations were introduced as acompetitiveness piece of legislation2 by Senator Bill Frist and Senator HarryReid in the last week of September. The bill had 70 co-sponsors: 35 Democratsand 35 Republicans. It may have been the only piece of legislation introducedby both Senator Frist and Senator Reid in this session of Congress, and cer-tainly the only one of that importance, with that kind of co-sponsorship.

For those of you in policy work who wonder if new policies can ever getadopted, this legislation proves that an urgent need accompanied by a specif-

Senator Lamar Alexander a

2. A bill to invest in innovation and education to improve the competitiveness of theUnited States in the global economy, 109th Cong., 2nd sess., S. 3936, introduced9/26/2006. See http://thomas.loc.gov/cgi-bin/bdquery/D?d109:12:./temp/~bdnJyR:@@@P |/bss/d109query.html.

8 | Senator Lamar Alexander

ic set of suggestions may receive unexpected attention and support from bothparties in Congress. I have very much enjoyed working with SenatorBingaman on this issue.

In August 2006 I traveled to China with a group of my fellow senators. Thetwo lead senators were Ted Stevens, who flew with the Flying Tigers in WorldWar II, and flew the first cargo plane into Beijing at the end of World War II,and Danny Inouye, who won a Congressional Medal of Honor fighting for theUnited States as a Japanese-American in World War II.

While we talked with President Hu Jintao and Premier Wen Jiabao regard-ing Korea, Iran, Iraq, and many other issues, the two leaders were the mostexcited about how to turn China into a nation of innovation and how theycould raise their standard of living by improving their brainpower ability.

President Hu had just returned from the Chinese National Academy ofSciences and Engineering. He assembled them all in the great hall of the peo-ple, and he said, “We must have a huge leap forward of science and technol-ogy. We shall put strengthening independent innovation capability at the coreof economic structure adjustment.” President Hu’s plan is likely to succeed; itincludes reforming China’s universities and massively investing in newresearch. President Hu later concluded: “We all bear the time-honored mis-sion to provide strong scientific support for the construction of a well-offsociety by improving our independent innovation capability and by buildingan innovative country. I hope that our scientists and technicians will strivehard to make brilliant achievements and constantly contribute to our coun-try and the people.”

We have also seen India’s version of what China is doing in Bangalore:recruiting top talent, growing top talent, investing in research. This is the new‘flat world’ Tom Friedman3 writes about and a lot of us talk about. What dowe do about it? It is important to stop for a moment and realize that theAugustine report’s title, Rising Above the Gathering Storm, is a good descriptionof where we are. It does not say going over the cliff, or the sky is about to fall;it just says the storm is gathering. This is important to note because the UnitedStates still produces an incredible amount of wealth given the number of peo-ple we have in this country. And our share of it’s going up, it’s not going down.

3. Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-first Century(Farrar, Straus & Giroux, 2005).

Senator Lamar Alexander | 9

In 1995, according to the International Monetary Fund (IMF), the UnitedStates produced 25 percent of the world gross domestic product with about fourto five percent of all the people in the world. That was ten years ago. Now we’vehad all this out-sourcing, in-sourcing, globalization, gnashing of teeth, and jobsgoing overseas. What’s been the result? According to the IMF, in 2005, theUnited States produced 28 percent of the gross domestic product. Now wemight get into a pretty big argument over whether it’s fairly distributed once itgets here. But the fact of the matter is we’ve gotten richer over the last ten years.We’ve achieved this growth in a number of ways, but our secret weapon is ourbrainpower advantage: the finest system of colleges and universities in the world,attracting 500,000 of the brightest foreign students who then work hard toimprove the U.S. standard of living.

Of the one hundred American Nobel Prize winners in physics, half of them areimmigrants, or sons and daughters of immigrants. No country has the nationalresearch laboratories that we do. So this innovation has been responsible for much,many say more than half, of the new jobs since World War II. And we worry thatwe might be losing that brainpower advantage to China, India, Finland,Singapore, and Ireland. That is why Senator Bingaman and I just did a perfectlyobvious thing. We went to the National Academy of Sciences a year and a half ago,and asked, “Exactly what should we do to keep our brainpower advantage over thenext ten years? Please tell us in priority order.” To their great credit, the Academiesof Sciences and Engineering and the Institute of Medicine put together a top flightteam and they got Norm Augustine, the former head of Lockheed Martin, to chairit, and they came back with 20 specific recommendations.

With a lot of help from Senator Pete Domenici, who’s been terrific on this,all this was put into legislation, and eventually attracted 35 Democrats and 35Republicans. Among the policies set forth by the bill is an increase in fundingfor basic research in the physical sciences by ten percent a year for seven years.The legislation also provides 25,000 undergraduate scholarships and 5,000graduate scholarships for future scientists, allows foreign students who earn aPh.D. in the sciences in the United States to stay one year after graduation,makes those who find a job automatically eligible for a green card, recruits10,000 new science and math teachers with four-year scholarships, trains50,000 current teachers in summer institutes at national labs and universities,authorizes a coordinating office to manage the centralized research infrastruc-ture of at least $500 million a year, and offers a research and development taxcredit for companies.


Now in most cases in the Senate, authorizing legislation just gives us permis-sion to fund it. But it is an important first step. We have made a lot of progress.Senator Bingaman, Senator Domenici and I met with President Bush at the endof last year and he put in his budget nearly six billion dollars for his Americancompetitiveness proposal. Then the various committees in the Senate workedtogether on the bill (that I mentioned earlier) that Senator Frist and Senator Reidintroduced in the last week of September. What is remarkable about the bill isthat it was not written by the Republicans and handed to the Democrats, or viceversa. We wrote it together. The chances of it passing in a Democratic Senate aretherefore just as good as the chances of it passing in a Republican Senate.

Senator Bingaman will talk about most of the other programs we are devel-oping. He has been working on Advanced Placement programs and other poli-cies that I have been particularly interested in for many years, such as theauthorization of small initiatives, including support for states creating residen-tial high schools for outstanding students of math and science, similar to theone that has operated in North Carolina for the last 20 years.

The Augustine Commission reviewed hundreds of proposals and tried topick the best of them. Those ideas are part of what we recommended in ourbipartisan. The spending authorized over the next five years is $20.3 billion innew spending for these projects. This is a significant savings over what was orig-inally reported by the committees. We recognized that we have budget chal-lenges and we tried to avoid unnecessary duplication of existing programs, butin my view and the view of many other conservative Republicans, keeping ourbrainpower advantage by investing in science and technology is just as impor-tant a part of a pro-growth economic strategy as tax cuts are.

Where do we go from here? The political ground has shifted. We have aDemocratic House, we have a Democratic Senate, and we have a Republicanpresident in his last two years. That should not hurt this proposal at all. BartGordon (from Tennessee), who is likely to be the new chairman of the ScienceCommittee in the House, introduced most of the Augustine CommissionReport in the House. Nancy Pelosi has talked about this as an important partof her agenda, and as I mentioned earlier, Harry Reid joined with Senator Fristin introducing the Senate bill. There have been as many Democrats asRepublicans in the Senate eager to get this done, and the President has madethis an important part of his agenda.

My hope is that as we begin the new year, the country, the President, and thenew Democratic Congress are looking for a way to show that we can lead, that

Senator Lamar Alexander | 11

we care about our country, and that we understand the future. I cannot think ofa better first step than to tee up a piece of legislation on which there has been somuch work by so many people on both sides of the aisle. The President can talkabout it in his State of the Union address and he can put it in his budget. SenatorReid has the ability to make it the first order of business in the new Senate.Speaker Pelosi can do the same thing. If the Democratic leaders do that, I believethe legislation could be passed by the February recess, and I hope that it is.4

QUESTION: While we rank high in competitiveness, our standard of livinghas actually stayed very flat. While the Augustine Report is an important step,is it really going to do enough? Who needs to take the lead to actually puttogether an innovative economy as opposed to just generating more input with-out any change to the structure of organization?

SENATOR ALEXANDER: The Augustine report deliberately was a list of20 things that were important, but also were 20 things that they could agree onand that they thought we could agree on. So they obviously left out a numberof things that are contentious, or broader. For example, our legal system is animpediment to innovation in our country. The Sarbanes-Oxley law is animpediment to new IPOs. All of that would have just provoked a big fight inthe Senate for six months, and we would not have gotten anything done. Sothese are 20 things in the Augustine Report that we could agree on that wereimportant to get done. There are a lot of other things, some listed by theAugustine Commission, that would be a broader part of an innovation agenda.It would be wise to regard the Augustine Report as a first step in the right direc-tion, and not a prescription for an entire innovation economy.

Well, the recommendations by the Augustine Commission are in priorityorder and they put K-12 math and science first. So making it a priority is thefirst thing. Second thing is an infusion of the best possible math and scienceteachers. There are all these formulas for how to improve schools, but in myview it boils down to about 95 percent parents and teachers, and we do notknow how to help create better parents, so that leaves the teachers. There areproposals at the University of Texas UTeach Program, which recruits outstand-

4. The bill was reintroduced by Sen. Reid in 110th Congress and incorporated inH.R. 2272, which became Public Law No. 110-69 on 8/9/2007.


ing students in the physical sciences, for example a chemistry major, and givesthat person a scholarship to become a chemistry teacher. And then the propos-al was also to give that person an NSF $10,000/year fellowship over the fiveyears after they graduate to raise their salary a bit. That idea represents anotheranswer to your question of how to keep the best teachers? Recruit new teachersand train existing teachers.

There is a proposal in here borrowing on a University of Pennsylvania pro-posal that would put teachers in the Oak Ridge and Los Alamos NationalLaboratories for the summer to infuse them with more excitement and train-ing for teaching. Finally, we are going to have to come to grips with the ideaof paying more for teaching well. I had fights on that issue when I wasGovernor with the National Education Association. We have got to pay goodteachers more for teaching well. Albert Shanker, the head of the AmericanFederation of Teachers, used to say, “If we have master plumbers, we can havemaster teachers. And if we don’t have master teachers who are paid more forbeing good, they won’t stay in the classroom; they’ll go somewhere else.” Muchof this focus is on teachers.

Senator Jeff Bingaman a

Senator Alexander did a good job of describing the legislation that we are try-ing to move ahead with in the Senate, and there is a reasonable prospect thatwe can move ahead either in the remainder of this session of Congress—the“lame duck” session—or early next year. I do not know of any opposition, atleast in the Senate, to proceeding with this bill and passing it.

I know many of you have been working on competitiveness, innovation, sci-ence, and technology for a very long time. Let me put things in a larger context.

One of our big challenges is to relate our objectives and work in the com-petitiveness area to the protection and improvement of the standard of livingof Americans. This is something that many of us do not fully understand. Inother words, what is the direct connection between the effort to make thecountry more competitive, and the effort to protect and improve the well-being of the average American citizen? We are going to be permanentlyfocused on efforts to keep our country competitive and to keep our standardof living as high as possible.

I believe that there are three big challenges that we need to focus on and thisis probably true with any permanent issue such as competitiveness. As I see it,dealing with such a challenge first requires a consensus on the problem and itsdefinition. But the consensus on the problem and the vision for its solutionmust remain strong. We have made some progress in that regard, but there ismuch more that can be done to educate and inform the public of the nature ofthis problem. We must continue to persuade the Congress and other electedofficials as well.

A second challenge is to identify the specific steps and actions that must betaken to address the issue or to achieve the vision. The Augustine Report hasdone a lot in this regard, by coming up with very specific recommendations. I

14 | Senator Jeff Bingaman

expect and hope that those specific recommendations will now be acted uponin a constructive way.

The third point I would make is that we need to have the political will andthe persistence to stick at it long enough to actually make a difference. We havesuch ephemeral agendas in Washington that every time there’s an election, there’sa new set of priorities. Sometimes that is very good, and obviously, I think thatthis latest change was fairly positive. But we also need to recognize that there aresome issues and some priorities that need to carry through and carry over fromelection to election and from administration to administration. I hope we cansustain the momentum behind this set of issues. I hope we can not only devel-op a better consensus that competitiveness is a priority for the country, but alsodevelop a consensus to pursue the kinds of specific actions that the AugustineCommission has recommended, and any other specific actions we can identifyover a period of years.

The report of the Augustine Committee gave us a very good first steptoward focusing attention on these issues and toward identifying the specificactions that need to be taken. We are in the process of getting the authorizinglegislation enacted by the Congress, and I agree with Senator Alexander thatthat is likely to happen in the near future. Then the real question will be: towhat extent does the Congress actually follow through with funding? To whatextent will the president’s budget actually reflect the categories and the levelsof funding that we are talking about in this authorizing legislation? I hope verymuch that the funding behind this legislation is properly and adequately setforth in the budget.

Furthermore, we must identify the other issues that also play a significant rolein maintaining the competitive posture of the country. In the energy area, whereI am particularly focused on now, there are a whole range of issues and specificactions that we need to be pursuing to maintain the standard of living and tomaintain the competitive posture of the country. Energy is an area that is ripefor innovation, because there is a lot of interest in new science, new technology,and the application of that science and technology to meet our national needs.

But again, the big challenge lies in keeping the focus and continuing to pur-sue these competitiveness initiatives. In 2005, we passed a major energy bill thatauthorized a great deal of activity;6 unfortunately, the administration’s 2006budget proposal omitted funding for these activities. Many of us experiencedthat frustration last year. I do not know if we will have that opportunity again inJanuary or February 2007 with regard to the energy research and development

Senator Jeff Bingaman | 15

initiatives that we authorized in the 2005 energy bill, but that is an example ofwhere we need to maintain the consensus to move ahead and to keep this a pri-ority. So that’s the big challenge. I would be eager to hear any suggestions thatyou folks come up with about how we keep up the momentum and the focus onU.S. competitiveness.

I am also interested in any suggestions you folks can come up with aboutother specific areas of action that are required, in addition to the funding of sci-ence and math education and the funding of research and development at ouruniversities and our national laboratories. Those are the Augustine Committee’sareas of focus. I certainly do not dispute the Augustine Committee’s judgmentthat those are the top priority issues, but there are many others that fit into thecompetitiveness agenda. We need to do a better job of defining the other prior-ities and develop more of a consensus on how to approach them.

We have a lot of very capable science and engineering talent in this countrythat is on the verge of retirement. We see that in New Mexico and we see it allaround the country. We need some creative thinking about how we can renewthe talent, the capability, and the expertise that we currently have and keep itproductively engaged for longer periods of time.

One of the great opportunities is to get more and more scientist and engi-neers into teaching. This is especially important as we consider new and poten-tially critical technologies such as the resurgence of nuclear power in the Capitol,because of the interest that companies are now showing in the development andconstruction of new nuclear power plants. A math and science renaissance in thiscountry must become an area of priority national concern if we want to realizethe full potential of technologies and their applications. The AugustineCommittee report starts us in that direction. There are a lot of people currentlyin the workforce who have a great deal more that they can contribute to thesekinds of efforts, and we need to find effective ways to keep them involved.

QUESTION: What do you think about putting the focus on innovationand technology together with the growing interest in alternative sources ofenergy?

SENATOR BINGAMAN: In trying to deal with our energy problemsthrough increased attention to science and technology, we face the same chal-lenges there that we face more generally, just trying to solve national problemsby focusing more efforts on science and technology. In the energy area, the dan-


ger, frankly, is that the price of gas goes back down to $1.50 a gallon, and weonce again lose a focus on dealing with energy problems. That’s been somewhatthe history of our national discussion about energy over the last several decades;the price of gas goes up, everyone gets up in arms, we have a lot of press con-ferences around Capitol Hill, and perhaps we rush off and actually enact a fewthings. But if the price drops again, the interest again drops in developing newtechnologies, alternative forms of energy, and increased attention to efficiencyand energy, and people lose the focus and move on to something else. That isthe danger that I see.

I hope we can avoid that this time. I hope that we can find some sustainableways to continue to move in this area. There is a lot of private capital going intothe development of new technologies in alternative energy. All of that could dryup very quickly if the economics change by virtue of a change in the price ofoil or natural gas.

QUESTION: In the new political environment, there is likely to be a move forrecognizing that one of the aspects of the present prosperity is a growing inequal-ity of income and wealth in American society. Many folks do not have the chanceto participate in our success in world competition. Will those developments andconditions be addressed in the policy discussions on competitiveness, economicperformance, and standards of living over the next couple years?

SENATOR BINGAMAN: That set of concerns will be very much a part ofthe debate and the focus in the next couple of years in the Congress, becausethe evidence is pretty incontrovertible that there has been a growing gapbetween the wealthy and much of the rest of America. We need to focus onthat. I do not think there is anything inconsistent between trying to come togrips with that, and also trying to focus on keeping the country competitiveeconomically. I think the two concerns go hand in hand. The issue you raisedis one that is going to get a lot of attention. We do not have a silver bullet solu-tion to it. The new Democratic Congress is hoping to move ahead on a varietyof proposals, such as the minimum wage, that will at least begin to focus on theissue. There is no question that the problem exists, and it is one that we hearabout when we visit with people in our home states.

QUESTION: Has any thought been given to the fact that some of the teachercertification exams are inane?


SENATOR BINGAMAN: I agree with you that we have some barriers topeople going into teaching that make no sense, and that we need to try tobring change in that area. There is a question as to whether the federal gov-ernment should be overriding states in that regard, and to what extent, andthat has always sort of held us back in that area. Some states, I think, havecome up with ways to get people certified to teach, which do not involve alot of the inane requirements that you have referred to. Many have not, andwe need to think creatively about what the federal government could do,short of preempting states on that issue, which would not be well received bya lot of people.

QUESTION: My question goes back to the 1980s and the focus on criticaltechnologies. Do you have any plans to revisit that question in the nextCongress?

SENATOR BINGAMAN: We do not have any specific plans to do that. Itwas a useful exercise when we pursued it in the 1980s, to try to get our country tofocus on those technologies that had the greatest chance of actually making a dif-ference. Particularly in relation to energy, there are technologies for alternativeenergy, alternative fuels, and increased energy efficiency, where we could well investmore heavily than we have been investing. Maybe identifying and highlightingthem would help us to do that. It is something we are going to look at.

On the issue of visas and immigration, I recently saw some statistics thatshowed the number of foreign students coming to this country is, once again,up this year over what it was last year by six or seven percent. We are finallybeginning to dig out of the trough that we have been in as far as attracting for-eign students, so I think that problem is on the way to getting fixed. This wasone of the critical areas the Augustine Commission focused on. We need toattract the best and the brightest to our universities as we traditionally have, andI think some of the changes that have occurred in the administrative handlingof visas has helped that substantially.

On trade coordination within the executive branch, I agree that we do not haveany serious effort at export promotion through our various executive branches. Imean that we have some focus on that in the Department of Agriculture, of course,but when you look across the agencies, we have not put export promotion on ourlist of priorities. We need to put it at the top of our list if we are going to deal with


the trade imbalance in a meaningful fashion. The more we can do on the exportpromotion side, the less pressure there will be to become protectionists, and so it isvery much in the country’s interest to make that a priority.

QUESTION: The Middle East oil producers cut oil prices when they see theUnited States move infrastructure away from dependence on oil. Europeans usegas taxes to stimulate innovation in energy efficiency and transportation. Wouldit be possible to persuade the American public to keep oil prices high and mov-ing the money into the U.S. Treasury instead of the pockets of the Middle Eastoil producers?

SENATOR BINGAMAN: I think President Bush is well known for hisopposition to tax increases of any kind. What you just described would clearlybe characterized as a tax increase, and accordingly nothing like what you havetalked about is possible, at least in the near future.

QUESTION: Many of us are concerned over the rise in tuition expenses. Doyou see any significant movement to address this problem in Congress?

SENATOR BINGAMAN: There is certainly an interest in trying to, onceagain, begin to increase both the amount and the number, of Pell grants. The annu-al cost of a higher education has increased by about 40 percent in the last five years.We have not increased the amount available in Pell grants at all in that period, sothat is another area in which the Congress is trying to take action. I hope we canget an agreement by the administration to do that.

QUESTION: How do you balance the need for strengthening our non-prolifer-ation agreements with the need for a safe and effective nuclear power supply?

SENATOR BINGAMAN: I agree with you that we have a very seriouschallenge in the non-proliferation area, and frankly we do not have a goodblueprint for how to proceed in that regard. We’re going to be debating theU.S.-India Nuclear Agreement5 sometime in the next couple of months, and I

5. Agreement for Cooperation between the Government of the United States of Americanand the Government of India Concerning Peaceful Uses of Nuclear Energy (123Agreement), U.S. Department of State, August 3, 2007. See http://www.state.gov/r/pa/prs/ps/2007/aug/90050.htm.


have had real concerns about the proliferation implications of that agreement.We will have a chance to offer amendments and try to focus people’s attentionon the implications for nuclear proliferation, but that is a very real issue.

At the same time, I have a substantial interest in seeing nuclear power onceagain pursued in a serious way in this country, because, not just in this coun-try but worldwide, nuclear power is the one type of base load energy that wehave identified that does not create greenhouse gas emissions. The problem ofglobal warming is a real one and one that we need to deal with. Again, I hopevery much that we can get a consensus in these last two years of the BushAdministration to change course on and begin to do something responsible ongreenhouse gas emissions. I think there is a crying need in this country tobegin working toward a cap and trade system that would be similar to whatEurope has tried to develop in their cap and trade system. There are a lot ofbig challenges in each of these different areas.

QUESTION: How could Americans be better protected from the inherentinstability and uncertainty in the global economy? Would portable pensionsand health care be an effective way of insulating U.S. workers from job lossesor a weak economy?

SENATOR JEFF B INGAMAN: There is a general consensus that thereis going to be a lot of turmoil in our economy. That is the way our economyis structured. There is going to be a lot of change, a lot of job creation, and alot of job loss. I do not think that anyone would doubt that that turmoil willcontinue. The real question is does the end result of that turmoil improve cir-cumstances for most or deteriorate circumstances for most? We need to per-suade people that we are able to control those larger trends. I think people areaccepting of that kind of change as long as they feel that their opportunitiesfor employment are not going to be constantly less attractive than what theyhave had in the past.

As far as the pension requirements, health care, and the other factors youmentioned that are impediments to companies pursuing innovation, we haveless of those obligations than virtually any developed country in the world. Weimpose fewer requirements on companies with regard to maintaining employ-ees, providing pensions, and providing healthcare. If anything, we need to befinding ways to strengthen the safety net for folks that do fall out of the sys-tem. From my perspective, there are not a lot of companies that are dissuaded


from doing innovative things because of the extra burden the government isputting on them with regard to how they treat their workers.

STEVE PEARLSTE IN: I write about economics and business, and occa-sionally about competitiveness. It is actually one of the problems that theSenators have and that someone like me has when you write about competi-tiveness, because you know everything in life is a poll. When you write aboutcompetitiveness, you get zero letters or emails, and you begin to develop a sensethat it is not the sexiest topic in the world.

The topic before us is new thinking in international trade, and I would justlike to start by reminding folks of some things with a short history of the recentold thinking in international trade. If we were here 25 years ago, someonemight have given a talk about how the Japanese model was the best model forgenerating wealth and technological innovation in the economy, and that weought to follow that model in this country. If we had had this conference 15years ago, maybe Robert Reich would have been here telling us that actually theGerman model was the best model, and we should be following that model.

Ten years ago, some forward looking people would have been here and said,“Ahh, they were all wrong. Look what happened to Japan and Europe. The bestmodel is right here in the United States and in Britain: low taxes, no regulation,and let the market take care of itself.” And now we are here today in 2006, andwe are all worried about China. I do not know whether anyone would suggestthat we exactly embrace the Chinese model here in the United States, but thereis probably something to be learned about what it is they do well and whetherwe could do it here.

Our first panel is going to look at what other industrialized countries aredoing, in terms of their national strategies, to build comparative advantage.

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MARK LEHRER: I will be talking about recent economic development poli-cies in France and Germany. Getting right to the heart of the matter, do poli-cies to build comparative advantages actually exist in France and Germany?Well, certainly both countries have policies that aim to expand the economicand skill base to create new jobs, and increasingly this is happening at regionaland local levels instead of at the national level. These policies are non-mercan-tilist, in my view, and in fact, they greatly resemble the type of economic poli-cies that we see in our U.S. states.

Beginning with France, their approach to building new sources of compar-ative advantage tend to be guided by the French state, and involve coordinat-ing large-scale projects, particularly in areas like nuclear energy, aerospace, andso forth. This is very well known. It is also well known that the effectiveness ofthe large-scale project approach is declining. There are many reasons for this,including EU regulation, budgetary constraints, and the globalization of mar-kets and production. But it is not dead yet. The French are still shelling out fivemillion euros for a fusion reactor. But nonetheless, the large-scale approach tocreating new sources of comparative advantage is declining.

So if you have a national government that can no longer generate compara-tive advantage the way it used to, what do you do? You turn to the regions, andthis is what France has done. A good example of this is the regional cluster ini-tiative, so-called “poles of competitiveness.”

The French are very interested in clusters, or intra-regional or inter-region-al networks of R&D institutes and firms. The national government went to theprefects of the region and said, “What sources of comparative advantage do youhave in your region? Show us some good clusters,” and “show us a plan forupgrading and developing those regions, and we will fund it.”

The prefects of the regions then had to go out and submit their own call forproposals locally. The regions collected 105 proposals altogether and sent themto Paris, where they were evaluated by a panel of 30 mainly scientific experts.But it was the national government, specifically an inter-ministerial commis-sion, that selected 67 of these competitive clusters. Paris was not the winningregion; it was Lyon.

In the southeast, there were 15 clusters that were selected in the region ofRhone-Alps. That region, which has medium-sized firms in Lyon and has longmilitated for more autonomy in economic planning, is getting it, as are theother regions. The list of the poles of competitiveness in Rhone-Alps demon-strates that they are funding everything from medical research to sports goods.

These policies do not aim at creating new clusters. The clusters already exist.Rather, they aim to upgrade existing clusters and build the clusters within thecountry and even internationally.

There is nothing specifically French about this. The Organization forEconomic Cooperation and Development (OECD) calls this “decentralizedcollaborative governance,” in which calls for proposals and incentives to net-work come down from the French state. But ideas, self-promotion, and theexecution of economic initiatives are more bottom-up. However, the nurtur-ing of clusters does shed some light on the protection of national championsin France.

Germany represents a slightly different case. Traditionally, Germany has notrelied on the state to develop new sources of comparative advantage. That wasmore the business of industry and industry associations, such as banks, unions,and semi-public organizations. The planning-heavy German system was veryeffective for nurturing major export sectors in areas like automotive, machinetools, chemical, pharmaceutical, and industrial electronics—what is oftencalled medium-tech industries. Germany has also historically been a very largeexporter, especially in those industries.

Germany’s problem is employment. The industries that I just mentioned donot generate much new employment. This is very well-known in Germany. Mystatistics and OECD statistics both show that Germany has serious trade andpatent deficits in high-tech sectors like IT, semiconductors, biotechnology, andeven optics and new materials. Germany’s government has been trying to dosomething about that since the 1960s without much success.

These disappointing policy results stem partly from the structure ofGermany’s government. Germany does not really have at the federal level thelevers that it needs to change its sources of comparative advantage. The min-istries, by constitution and by habit, are quite autonomous. Therefore, the fed-eral chancellor does not and cannot tell the ministers what to do. That meansthere is a lack of coordination among ministries at the federal level.

For example, the Ministry for Educational Research is able to fund R&Dprojects, but cannot do much more than that. The Federal Economics Industry,on the other hand, has always been traditionally laissez faire and has been veryskeptical of efforts by the research ministry or other ministries to try to spon-sor new industries.

That is very different, however, at the state level, that is, the so-called Länder,in Germany. The German states are far more autonomous than the regions that

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you see in France, and some of them, like Bavaria, regard themselves as practical-ly sovereign countries. That means that a state premier like Edmund Stoiber ofBavaria has the latitude to govern with a very strong hand and will have person-al contacts to local industry leaders. The German states also run their own col-leges and universities.

Since at least the 1980s, certain German states have implemented their ownindustrial policies, and that has sometimes been called the MITI-zation (the for-mer Japanese Ministry of International Trade and Industry) of Länder industrialpolicies. Now you would ask the question, “Well, who’s MITI in the Germanstates?” The answer is: the state premier and his or her own political dynasty,which has very close contacts to industry and will listen to industry.

Bavaria, for instance, has poured billions into the sponsorship of high tech-nology, and not because of leadership from the parliament or the ministers. Itreally was Edmund Stoiber, who relied only on a privy council of about a dozenexperts. Edmund Stoiber said, “Here is the money we are going to spend on hightech. Parliament, this is what we are going to do,” and they did it. Of course, inBavaria it helps if you have a party majority and a sort of one-party hegemony.

As a result, Bavaria has invested massively in high technology. The first ini-tiative dates from 1994, the “future of Bavaria offensive,” where Stoiber took2.9 billion euros, raised from the privatization of Bavarian state firms, andinvested in R&D centers, technology parks, and incubators across quite a widerange of technology fields.

The second phase was called the “high-tech offensive”—by the way, that is notan English phrase; that is the original German. In this phase, another 1.35 euroswere raised from privatization and invested in R&D. This time, there was a trackrecord showing that the life sciences firms, especially the biotechnology firms,were doing well. So a lot more funding went into the life sciences. This year, thereis a new cluster initiative. It is only 50 million euros, but it is good for propagan-da and publicity. Now they are into clusters as well. Clusters are what is in fash-ion in old Europe, you might say.

In conclusion, the nurturing of comparative advantage has been increasinglydelegated to regional and local levels. There is an emphasis on making selectiveR&D investments and in targeting local sources of industrial excellence forupgrading in clusters. What can we learn from France and Germany? We wouldwant to learn from their mistakes and avoid repeating them. Both countries havefossilized higher education systems. They have national science systems that donot have enough openness and competition.

I live in Rhode Island and I work in Massachusetts. Those two states havecompletely interwoven economies, and yet there is almost no coordination of eco-nomic planning. One idea to consider, for example, is a multi-state cluster, whichyou might call the New England poles of competitive initiative.

MARK T ILTON: I am going to talk about the Japanese approach to creat-ing and preserving comparative advantage. The first thing to say aboutJapanese policy is that there has been a big push in recent years toward liber-alization in general. In many ways, the model has been the United States. Thepush has been to move towards more liberal markets for capital labor andcommodities. There has been a push for stronger antitrust measures, althoughnot too strong. If we compare Japan with the United States, however, we finda lot of lingering mercantilism.

There certainly are community policies for promoting particular indus-tries. The industrial revitalization law has been important. It put money intoall the industries to help firms in those industries put money in the old indus-tries themselves. In new areas, there has been money for investment in newindustries as well. Japan also has a regional cluster plan, although it has notbeen as central to policy as in Western Europe.

Japan has emphasized targeting particular industries and technologies. TheUnited States has been very much the benchmark of success for Japan. A cou-ple of policies I call “E-Japan and U-Japan” have attempted to help Japancatch up with the United States in the use of the internet. “E-Japan” firstpushed the promotion of fast access to the internet. Japan put money intoexpanding its fiber optic networks. “U-Japan,” standing for ubiquitous Japan,emphasized a push on smart tag technology that allows all commodities tohave a little code in them so they can be tracked easily. The government isvery much behind these policies to help Japan innovate in ways that wouldenable it to catch up with the United States.

One thing Japan has been very aware of is its dependence on the UnitedStates for information technology, especially software from Microsoft. Thereis an awareness and concern over Microsoft’s monopoly, and big governmentis pushing to try to develop alternative software.

What has been interesting in just the past few years is that there has beenkind of a push to a quasi-EU in East Asia. Just as the EU put France andGermany together, sworn enemies a few decades ago, in Asia there is a pushto bring the People’s Republic of China, Japan, and South Korea together. We

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read in the newspapers all the time about lingering problems over World WarII that these countries still have.

However, there have been close talks for the last several years between thesecountries on challenging the United States’ monopoly in software. On theJapanese side, this has meant bringing Japan’s leading firms—Hitachi, Sony, etcetera—to come together on information technology and meet regularly withthe Chinese and the Koreans to develop the technology. A number of agree-ments have been worked out in a wide variety of technology areas. As is typicalof the old Japanese model, there is a quasi-government agency that then pro-motes these new software and technologies throughout Asia, Southeast Asia,South Asia, and East Asia.

Japan has also used important policy to help industries scrap and build. Thislooks like pretty old-fashioned industrial policy. Although there has been a bigpush for liberalization in Japan, it still looks pretty similar to what it was like in1990. However, if we compare Japan with the United States, or even with Europe,we still see a lot of mercantilism. So Japan is still doing this. Japan has not had adecade of great growth and there are a lot of warnings of what not to do.

If we look at the steel industry, for instance, we find it is a lot of the same oldstuff. I follow the steel industry. I look at these numbers every year and they stillhold on with these old cartels. They pushed a merger between the two big firms,but that has been the only difference. METI (Ministry of Economy, Trade andIndustry) continues to monitor, monitor this cartel. METI says that this is newthinking and that there is a strategic vision for steel. It is a key input for autos andthe auto industry is pretty happy to have these arrangements in steel. METI saysthat steel is a high-value industry, and Japan has a state-of-the-art steel industry.

Steel is, nevertheless, a pretty low-growth industry. We can see the effects inJapan’s trade profile. Japan doesn’t import much steel. There are still manyinformal barriers to trade. I talked to people in Europe about the comparisonsbetween the two places, and Japan just has a tighter lock on markets thanEurope does. European countries import a lot of steel. A lot of it is, of course,between each other, but even the EU as a whole imports a lot of steel, as doesthe U.S. Japan doesn’t.

In addition to having domestic controls, Japan has informal agreements withEurope and Asia to keep out foreign steel. This is not a great recipe for successbut it is what Japan keeps doing.

My discussion of the Japanese auto industry begins with Toyota. Toyota likesstable ties with its suppliers. It is happy to have stable relations with steel firms.

The auto industry is a famous example of a case where pushy industrial policywas not important. It is certainly not the key explanation of why the industryhas done so well. When we think about an important industrial policy in autosthat gives the Japanese auto industry a base for being competitive and forward-looking around the world, it is that they have an energy policy. There is, byEuropean standards, a modest gasoline tax. Nevertheless, they at least have a taxon gasoline. The United States has virtually no tax on gasoline. It is quiteremarkable that we can come up with the collective gumption to actuallyinvade Iraq and occupy it, but somehow cannot tax ourselves on gasoline.When we think about what we could do to help our industry compete and lookfarther ahead, we certainly could look to the Japanese model here.

If we look at Japan overall, it is not a very globalized place. Japan haschanged a great deal over the last 15 years, but in international terms, not muchhas changed. It talks about wanting foreign direct investment, and there is a lit-tle bit more than there used to be, but still not very much. Foreign affiliates inJapan do not produce very much and they do not give much competition todomestic Japanese firms. Thinking again about the steel industry, although ona broad, general level, METI says they have been very actively encouraging for-eign direct investment. However, when it comes to what they still consider tobe a key strategic industry, they have been very wary of liberalization. Theythink: “What if Mittal Steel did what it did in Europe and bought out one ofour steel firms and shook up our cartel? That would be terrible.” They havetherefore been very active with the steel industry to prevent that. Japan, in thisregard, does not provide a good model to follow.

Japan still does not import much. Imports are up in the last ten years to 12percent, but still behind the United States. This has occurred even thoughJapan is on the doorstep of the workshop of the world in China and SouthKorea. Even though Japan of course is a much smaller economy than theUnited States, we would expect higher levels of trade. Therefore, Japan is alsonot a good model in terms of imports.

Despite the Japanese strategies I mentioned earlier, the United States is still thebenchmark for telecommunications technologies. The United States does very wellbecause it has a more open economy. Japan is great at certain things. For example,the cell phones in Tokyo are very impressive. Everybody in Tokyo is constantlydoing everything on their cell phone, which is really quite remarkable. But Japanhas not been able to sell these cell phones anywhere else because they cost a for-tune. The rest of the world is not willing to buy them. The idea of getting togeth-

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er with China and South Korea is based on the lure of an enormous market. Theythink: “If we could get our technologies into China and figure out how to sell themthere, we could then have a basis for our technologies being standard throughoutthe world.” That is the hope. But Japan has not figured out how to come up withtechnologies that sell well in other advanced industrialized countries.

The United States complains about informal protection of the steel marketor other markets. There have been attempts to work through the WTO onthese sorts of things, but that does not really work and there is little benefit. Inthe United States, we have contracted our steel industry and our economy over-all has done much better than Japan.

Japan also seeks to build on existing strengths in education innovation. Hereagain, Japan looks to the United States. Japan has a terrific lower grade educa-tional system. I have had my own kids in a number of grades in Japan and it isquite wonderful in a lot of ways due in large part to the fact that teachers arepaid very well in Japan. They therefore get great talent in the Japanese educa-tion system. However, at the university level, Japan is looking to the UnitedStates to see how it could build universities that would prepare students to bebetter innovators and to work more closely with entrepreneurs to develop tech-nologies that could succeed in world markets.

The one key area where the United States has a great deal to learn from Japanis in energy policy. There are constant complaints about some unfortunate envi-ronmental policies in Japan such as killing whales. But on a broader level, Japanis very responsible on energy policy and it helps their industry. This is reallysomething the United States could learn from. It is also unfortunate that we aretalking about ways we could innovate when gas taxes are off the table.

GARY HUFBAUER: I am going to talk about the United Kingdom andIreland, which has much less central direction or planning.

I want to begin with a few statistics. The GDP per capita of the UnitedKingdom is about the same as in France, and is about 75 percent of the GDPper capita in Germany. The old industries are in decline and the UnitedKingdom is not trying to rescue them in the way Japan is attempting. In thelast decade, the performance has been better in the United Kingdom than inGermany or in France. In terms of GDP, the United Kingdom has seen aboutone percent faster growth. But probably more importantly for most people,unemployment is quite modest in the United Kingdom. It is similar to ourlevel, whereas in France and Germany, unemployment is quite high.

The inward foreign direct investment stock in the United Kingdom isabout 40 percent of GDP. The figure is only about 18 percent in Germanyand 30 percent in France. So the United Kingdom has been a magnet forinward investment amongst the major countries in Europe.

I want to talk in greater depth about two things in the United Kingdom.The first is finance, which builds on a very old tradition, and the second is opencapital markets. Older people in this room remember how the United Stateshelped London get going with our interest equalization tax in the Kennedy era.That misguided tax gave a big spark to the London financial markets.

More recently in the United States—in the last ten or fifteen years—wehave seen quite a bit of new regulation over financial markets. In fact, thegovernor of New York got elected on the back of scolding the New Yorkfinancial markets. The model in London, on the other hand, is very different.

Compared to the United States, the United Kingdom has a simplified reg-ulatory system. The Financial Services Authority (FSA) maintains broad con-trol over banks, the stock exchange, and other financial institutions based inthe United Kingdom. But the FSA exercises its authority in a flexible man-ner. The resulting regulatory environment has led London to a dominantfinancial position in Europe which is second only to New York in the world.In some sectors, it is more dominant than New York, which is remarkablewhen we consider that the currency in Britain is still the pound sterling andthe rest of Europe has gone to the euro. It was thought that retaining the cur-rency might be a disadvantage. It turned out to be no disadvantage at all.London finance houses deal in euros just as well as anyone else. In fact, theycan deal better than in Frankfurt or Paris.

As a result, there is a whole range of areas where the London financial mar-ket is absolutely central to the world system. This has led to an enormouscluster of financial talent in London, which has a natural tendency to expand.This is far more successful than anything France or Japan has created.

What is the U.K. policy now? The new regulatory approach and the “bigbang” in financial markets about fifteen years ago eliminated many of the oldfixed-price systems and market barriers between financial players. Those werevery important steps in the Thatcher era. Current regulation is quite goodand has attracted and indeed welcomed many foreign banks.

The other friendly U.K. policy which deserves favorable note is that thetaxation of individuals in Britain who are citizens abroad excludes their for-eign investment income. Their earnings in the financial markets are taxed,

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but a lot of these people have wealth abroad that is not taxed by Britain.Thus, the tax system is quite friendly to financiers.

What are the other policies in Britain that might possibly rank with the fea-tures in other European countries and Japan? Silicon Fen stands out, but U.K.policies did not create Silicon Fen. Silicon Fen is fed by the brilliance ofCambridge University and the proximity to London, both of which are criti-cal features. Silicon Fen is an hour-and-a-half trip to London. Numerous firmshave sprung up since I was a graduate student at Cambridge in the 1960s. Butthe colleges, as institutions, do very little to promote Silicon Fen. St. John’sprovides a small industrial park and it is of no consequence. The location ofSilicon Fen does give it tremendous access to smart graduates. But the Britishstate was no more a driver of Silicon Fen’s success than the State of Californiais responsible for the success of Silicon Valley, which is to say that the govern-ment can claim little credit for their economic and technological success.

Ireland is truly remarkable. It is the best performing economy in theOECD. When I was a student at Cambridge University several decades ago,the British view of the Irish was not one of admiration. Times have complete-ly changed.

What did the Irish do? They embraced the “Washington consensus” farbefore John Williamson thought of the term. Ireland is the model of theWashington consensus. There was a complete change in macro policy from akind of a socialist, deficit-spending, inflationary policy to the Washingtonconsensus. So we could call it the “Dublin consensus.”

As a result of these and some other policies, Irish GDP per capita—muchof it earned by foreign firms—is now about $47,000 where the U.S.’ GDP percapita is about $42,000. The U.K.’s GDP per capita is about $37,000. Thereis migration. In my time, the flow was always from Ireland to Britain. Now,the flow of people is back to Ireland, from abroad as well as from Britain.Unemployment is amazingly low at just four percent. That is by far the lowestunemployment figure in Europe. Inward foreign direct investment is 126 per-cent of Irish GDP. Half of that FDI is from the United States. The mostimportant sectors are pharmaceuticals, computers, and chemicals.

Ireland has had fast economic growth; ten percent in the second half of the1990s, right up at the Chinese level, and six percent since 2000, which is verygood for a country at Ireland’s level of economic performance. It is the largestper capita exporter of merchandise goods in the OECD and the country isnow getting into finance. Of course, Dublin is small as a financial center com-

pared to London, but it is exactly replicating the London model in terms ofregulation and is doing very well for a small city.

Ireland also did some other things well. One which is truly important is thelow corporate tax rate. It is now 12.5 percent and it is flat. Both the fact that itis low and that it is flat is amazing. A company does not need an army ofaccountants to compute its tax obligation. The tax system is such a magnet thata few days ago the British essentially said, “Maybe we will apply the same taxrate to northern Ireland and try to catch up with the south.”

STEVEN PEARLSTE IN: On the question of business culture and political-economic culture, which can be difficult to fully describe and understand,could each of you talk about what public policies either reinforce or do notreinforce a culture that encourages entrepreneurship, innovation, hard work,and views toward wealth? In some ways, it is a question of whether the culturecomes first or last. In any case, it is part of the dynamic in each of the coun-tries, whether Japan and the view toward outsiders, which is reflected in theirpolicies; or in Ireland, where there has been a tremendous shift from the viewof wealth as something that is negative to the celebration of entrepreneurship.There have been some similarities in Europe. Could each of you talk about thedegree to which you think government either is trying to change the culture oris reinforcing the negative parts of culture in terms of business?

MARK LEHRER: The government is able to do many things to change cer-tain aspects of business culture. France, but especially Germany, has tried hardin the past decade to create new incentives for individuals and groups to startup their own companies. There was a high-tech boom in Germany in the1990s, when it became easy to start one’s own company and waste other peo-ple’s money. There were many high-tech firms starting up in the late 1990s andgoing broke in the year 2000, just as there were in the United States.

MARK T ILTON: We were talking earlier about developing talent, and anenormous concern in Japan is about future talent in the sense that children sim-ply are not being born. This is not completely different from Western Europe,but Japan’s birthrate is even lower than that of the rich countries in WesternEurope. The concern is essentially that the Japanese are great at working reallyhard, but their corporate culture is so strong that there is no time to have kids.Women look at what a life with a Japanese husband will be like and simply say,

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“I don’t want to do this.” There was a big bestseller with the message: do notget married; it is awful.

The Japanese government is worried about this. They have population pol-icy bureaus, but have a very hard time changing this particular culture. Thereis also concern about innovation and venture capital, and the Japanese govern-ment has had a difficult time figuring out how to spark that. But there has cer-tainly been financial liberalization, and that has helped Japan move a little bitaway from the old rigid system. But it has been difficult to change Japan’s cul-ture in many ways.

GARY HUFBAUER: The British, even under the old days of socialism ofHarold Wilson and James Callaghan, were never envious of wealth in the way ofsome other European countries. Certainly, since the Thatcher revolution, TonyBlair has continued to be very friendly to wealthy people. Entrepreneurship hasbeen celebrated, from the Beatles and right down to J.K. Rowling. Ireland, ofcourse, has flipped completely from socialism to capitalism.

Where the British have seemingly failed, and they recognize this failure, is intheir neglect of two national assets, Oxford and Cambridge Universities. Goodprofessors still teach and do research there because the prestige is great, but theacademic pay is terrible. The British are also wrestling with their secondary andprimary education systems, in the same way as the United States. Education isquite a troublesome feature in the British landscape.

STEVEN PEARLSTE IN: It seems so obvious to us and probably to mostpeople that they should help Oxford and Cambridge. Is there some sort ofpolitical impediment?

GARY HUFBAUER: I do not know exactly what Jeffrey Sachs or PaulKrugman earn from their universities, but I would guess it is around$300,000 or $400,000. It would be somewhat scandalous for a public uni-versity in Britain to pay that kind of salary. But it would be fine if a privateinvestment banker or popular writer makes a billion dollars. No financier inLondon feels self-respect unless he is earning a million dollars. There is justthis enormous discrepancy between what a public university can pay andwhat the private sector can pay.

STEVEN PEARLSTE IN: In the Rhone-Alps, people seem to believe that theycan engineer and brand clusters. Should the United States invest in regional clus-ter development or rely on organic evolution? Does geographic proximity matterwith global innovation, assets, the Internet, and the migration of creative talent?

MARK LEHRER: There is a need for some kind of regional leadership inthese clusters. Even if you look at some U.S. clusters, you will see very strongleadership. For example, Silicon Valley is really the product of Frederick Termanat Stanford University, who worked on building up that cluster over a period ofdecades. Whether government agencies, such as those in France, necessarilyproduce the best leaders is an empirical question, and we will have to examinethe evidence to get an accurate answer.

As for the importance of geographic proximity in the Internet age, there aremany economists who have been working on that very issue, and they foundactually that geographic proximity does matter, especially in highly innovative,fast-moving industries. At the same time, because of the Internet and globalcommunications technologies, and France recognizes this, it is very importantto network clusters with the rest of the world.

STEVEN PEARLSTE IN: One of the big reasons that proximity still mattersis that people like to be with other people who are like themselves. They also liketo be able to move around firms easily without having to move their families. Itis not a very sophisticated explanation for things, but it turns out to be the wayhuman beings behave. Empirically, that seems to be an important factor.

Turning to Japan, how is the country doing in terms of its standard of liv-ing as compared to other countries?

MARK T ILTON: Japan is currently about even with France and Germany.It has fallen a bit in relative standing over the last 15 years. However, there is abig concern in Japan about increasing inequality and increasing unemploymentfor people with low skills. As a result, there has been a shift to a more open mar-ket. There has been a cost in terms of equality within Japan, which is the bigpolitical concern there.

STEVEN PEARLSTE IN: Does the collaborative state in France differ inany significant way from the East Asian development states in terms of pro-tecting and nurturing new industries?

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MARK T ILTON: Japan is very different from Europe in that there is muchmore scope for protective measures. If you compare what the Japanese govern-ment does with what the EU does on telecommunications, for example, the EUis very active in forcing national industries and markets to be open. Japan has nocorresponding body to ensure that openness is included with new industry plans.

MARK LEHRER: What Mark [Tilton] just said applies exactly to the Frenchsituation. The French have lost control over their markets. What remains to beseen about these whole regional clusters is whether they are a strong proactiveeconomic measure or really a measure of the government’s impotence in alter-ing the country’s economic base.

STEVEN PEARLSTE IN: Does London’s success in financial markets giveother industries in the United Kingdom a comparative advantage? In otherwords, is finance important and is their strength in finance turning out to bean important source of strength for other industries in the United Kingdom?

GARY HUFBAUER: After the United States, or maybe at equal levels withthe United States, venture capital is more easily raised in the United Kingdomthan in almost any other country. Maybe it is similarly easy to raise venture cap-ital in Australia. But venture capital would be the one very obvious thing, apartfrom all the employment for bond traders, derivative traders, and hedge fundmanagers. I am a believer—even though the statistics are not terrific on this—that equity capital is a better driver of innovation than bank finance. If you lookat equity flotation relative to GDP in the United Kingdom, it is very high com-pared to other countries, including the United States. Britain has an equity-driven economy to a greater extent, and that is a plus.

STEVEN PEARLSTE IN: In Germany they have been trying to develop anequity culture for ten years, and it is safe to say it has been a total failure. Theywere on the way to doing that, and they had a small business stock market, butit totally collapsed. After the bust, Germans put their feet in the water in termsof owning stock, and a lot of them got burned.

My favorite story on that is the privatization of Deutsche Telekom. Everyonewanted to get a piece of it so everyone went out and bought stock, and it waswidely held. Everyone was following it in the newspaper, and it was one of thethings that led the news every night. After the telecom bust it went down, and

there was a serious debate in the German parliament about whether the govern-ment should re-compensate everybody for their losses. Obviously, the equity cul-ture and even the understanding of it did not take a very strong hold there. Thisis related to my point about culture.

Does the popularity of the London Stock Exchange for IPOs suggest that theUnited States has a competitive problem?

GARY HUFBAUER: The New York financial market is obviously very strong.But there is a Sarbanes-Oxley problem, and Congress will address that. It seems theSEC is about to change Regulation 405 and make some improvements. But, considerwhat would probably not be acceptable in this country. If the New York StockExchange were to try to buy NASDAQ, or vice versa, that would probably beblocked. But that would not make any sense in a world where U.S. stock exchangesface competition from London and other stock exchanges. The U.S. antitrust systemis probably not as favorable as London’s system. Then we have this duplicate regula-tion—state and federal—in New York State. Other states are going to get into thegame as well and that is very harmful.

STEVEN PEARLSTE IN: Everyone says that the regulatory system in theUnited Kingdom is just much better. We have a rules-based system and they havea principle-based system. What does that effectively mean?

GARY HUFBAUER: The British Financial Services Authority has tremendousdisciplinary power and the power is written in quite broad terms. In contrast, theUnited States is quite specific in its rules, both at the federal and state levels. Thereare also several parties involved, including the Federal Reserve, the comptroller, theSEC, the state of New York, and possibly other states as well, all with a finger in thepie of regulating the New York financial market. They are all very legalistic, so if acompany breaks the rule, they broke the rule, and if they did not, they did not. Thereis quite a bit of legal back and forth on this, as opposed to a very powerful regulatorcalling up the president of an investment firm and saying, “What you are doing isinappropriate. Stop it.” Then they listen because nobody bargains with the FSA.

STEVEN PEARLSTE IN: The future of U.S. competition and growth seemsto ultimately hinge on our ability to produce an educated workforce. What les-sons do these countries hold for the U.S. education system? Is there anything thatthe United States might learn from them.

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MARK T ILTON: In the case of Japan, there has been relatively equalincome and there are not as many families in as much economic trouble asthere are in the United States. Parents have also not had as hard a time asAmerican parents on the bottom end. That has been very important. It is alsoimportant that Japan has been better at preparing not just the best and thebrightest, but also at preparing the kids in the middle and the bottom mid-dle. They are keeping them in high school and everybody learns some basicmath skills at a level that we do not meet in the United States. That has beenimportant for Japanese success.

MARK LEHRER: An educated work force is certainly a necessary condition,but German experience demonstrates that it is not a sufficient one. Germanydoes have a very well-trained population. Many people go to the university andreceive high level degrees. There is an extensive vocational training system. Butit is simply not enough. There are structural problems in the science, highereducation, and financial systems that show that an educated workforce is not asufficient condition for economic growth.

GARY HUFBAUER: It is difficult to say favorable things about the Britisheducation system, but there is one point that can be made. The tuition feesborne by parents are quite modest at Oxford and Cambridge. That is also trueat Trinity College Dublin, and the University of Dublin, which are very gooduniversities. The United States is building a university system which is verygood at promoting an elite class, thanks to exceptionally high tuition rates. YaleUniversity is basically inaccessible to the average middle class family unless thestudent wins a scholarship. That is not true of Oxford or Cambridge, so that isa meaningful benefit of the British education system.

STEVEN PEARLSTE IN: We all hope this is not true, but is there aninevitable trade off with a system that brings everybody up to a certain stan-dard, or that does not allow people at the bottom to stay at the bottom. Isthere a trade off between that kind of system and an education system in theUnited States where the people who do get through to the top schools suchas Yale, Harvard, or MIT, probably get a better education? We seem to havea superstar mentality toward education. Is there inevitably a trade off there,and if there is a trade off, which one is the better model to have from an eco-nomic perspective?

MARK T ILTON: The United States spends more money on higher educa-tion and less of it on the lower grades than Japan or European countries, and wehave had a higher growth rate. This is partly also due to immigration, whichtends to reinforce this trend because the United States receives very talented,bright people, as well as very low-skilled people. That exacerbates the tendencyto big numbers at the outliers of very talented and very unskilled components inour population. It is a trade off. Japan has looked at that trade off and movedmore in that direction, and Europe has been pulled toward similar practices aswell. At the same time, there has been a lot of political angst about the results.

GARY HUFBAUER: There may very well be a trade off. The countrieswhich have traded off the most are in Latin America. In comparison to theamount of money that goes to the universities in Latin America versus whatgoes to primary schools, the United States seems quite egalitarian. But the prac-tice does not seem to be paying off in Latin America. Furthermore, both Chinaand Japan have excellent top universities. They are right at the top of the top,so there is no quality lacking for the small fraction of students who are to reachthose top places.

STEVEN PEARLSTE IN: It might be that for a developing country you wantto try to get everybody up to a certain level. Once you get there, in an industri-alized country it may be that a different strategy is important. Speaking of LatinAmerica, to what extent have countries such as Uruguay, with a long experienceof relatively high per capita income and social benefits for skilled workers in themiddle class avoided the possible cost of those policies in terms of the interna-tional competitiveness of local industries by establishing tax-free zones that haveattracted internationally competitive investment? In other words, do Germanyand France have experience with tax-free zones and have they worked?

MARK LEHRER: No. They have tried to implement certain policies to helpEast Germany, but it did not work. But it is a good idea, nonetheless, becausethere actually is a trade off between vocational training in these older industriesand efforts to nurture new ones.

GARY HUFBAUER: The most successful examples of the high social safe-ty net model coupled with a thriving economy are the Nordic countries. That

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speaks to their uniqueness. In Sweden, the foremost of the success stories, the per-cent of GDP which is run through the government is still about 45 percent. Swedishbusiness leaders, such as the Wallenbergs, are very loyal to that Swedish culture.Swedish businessmen could usually move elsewhere and earn much more money atthe executive level, but these guys like living in Sweden. They like the culture andtheir country, and they are very loyal. They are not going to move down to Londonor Paris. The other thing Sweden does well is to run a very favorable tax system forSwedish multinational corporations. Sweden has high tax rates, but also credits anddeductions, which basically zero out the tax burden for new investment. France andGermany have not entirely succeeded in duplicating that model.

STEVEN PEARLSTE IN: Ireland has a very interesting wrinkle on this. Thereare essentially no taxes or very low taxes on royalties from patents and other licens-ing of intellectual property. As a result, Microsoft has shifted a lot of their opera-tions, including a lot of their R&D operations and a lot of their patents, over toIreland to run them through their Irish subsidiary. But they also are creating newpatents there because they know that from a financial standpoint it will be betterto create them there than anywhere else . Does that work?

GARY HUFBAUER: It works for Ireland. How much the model would workfor other countries remains to be seen because nobody else has tried it. Oneimportant statistic that is a tip to the supply side school is that Ireland collects abigger percentage of GDP in corporate tax than any other European country,even though the tax rate is very low. But Ireland has all that foreign direct invest-ment. What was said about royalty taxation is absolutely right. Ireland has signedtax treaties with many countries. But there is no doubt that there is a lot of taxabuse as well as genuine innovation. The bottom line is that Ireland is extremelyfriendly from a tax standpoint to all intellectual property, whether generated inIreland or brought from other countries.

STEVEN PEARLSTE IN: How does the infrastructure in Germany, France,the United Kingdom, Ireland, and Japan compare to that of the United States? Ifthere is an infrastructure deficit here, how might the United States address that?Broadband is one factor, but are there any others you can think of?

MARK T ILTON: On broadband Internet access, Japan and South Korea havehad public support for developing truly excellent broadband networks. There is also

criticism that the money was poorly spent, and that it is an equally good strategy towait and let private firms figure out what sells and what really works well. Those argu-ments are fairly persuasive. Japan has had a huge political push in the 1990s to try toreflate the economy, in what is now considered excessive investment in infrastruc-ture—too much road building, etc. So that is not a good model to emulate.

MARK LEHRER: An obvious deficit in the United States is in passenger rail,and Americans on the East Coast know that concern intimately. But it is not justthe Northeast. Miami, for example is beautifully designed for a subway system. Allof the industry is basically on one street, both in Miami Beach and in Miami.Mass transit and passenger rail is obviously a major problem that must and prob-ably will be tackled. But it requires initiative by state governors.

STEVEN PEARLSTE IN: In Europe there was some standard setting in invest-ment, for example, in telecom. Billions poured into technology. Did they pour itinto the wrong technology? Is that a big danger with regard to infrastructure fornew technologies? Is there a problem with the possibility of choosing the wrongtechnology and becoming stuck with it? Is it better to, as Mark Tilton noted, “letthe marketplace pick the technology.”

MARK LEHRER: Certainly in telecom, Germany did not pick the wrong tech-nology, but charged a lot for those third generation wireless technology (3G) licens-es. They charged a great deal in Britain too, and we may have to wait ten years forall the dust to settle on that technology. But it did help the government receipts.

GARY HUFBAUER: When something new is done in Singapore, the UnitedStates has difficulty adopting the practice. But when it is done in London, theUnited States should have an easier time. London has a very sophisticated systemfor taxing vehicles coming in to the central city. The English cannot build anymore roads in London than we can build in downtown Washington, D.C. or NewYork, but they do use their transportation network more efficiently. This is noteven being debated here, but London is much better at getting more out of itstransportation infrastructure.

STEVEN PEARLSTE IN: What kinds of labor and healthcare policies do thesecountries employ? Are these policies encouraging or discouraging to economicgrowth?

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MARK LEHRER: In France and Germany, it is pretty clear to everyone, evento the politicians, though they may deny it publicly, that labor market policiesare almost catastrophically inflexible. Their health and pension systems are theswords of Damocles that are hanging over the heads of these countries.

MARK T ILTON: In Japan, everyone has health insurance. It certainly makesit easier for poor families to raise children who will be successful. On labor pol-icy, Japan’s big problem is a corporate culture that is oriented toward permanentemployment, making it very difficult to go in and out of the labor market. Forwomen, that means choosing between having kids or a career. This is an areawhere the United States has a big advantage in terms of having a more flexiblecareer structure. Japan has not figured out how to do that. This is true to a greatdegree for old Europe as well.

GARY HUFBAUER: Both the United Kingdom and Ireland have muchhigher union membership than the United States—but the strident unions of the1960s and the 1970s are a thing of the past in both countries. The labor force isvery flexible. The United Kingdom has a national health service which even theconservatives did not try to abolish. The way they deal with the cost of health careis straight out rationing. The system is a mixed blessing. I know a French entre-preneur who runs a hip replacement clinic. He gets good French doctors but thecustomers are British folk who are on a two-year wait for hip replacement.

STEVEN PEARLSTE IN: Hospitals and clinics in Buffalo, New York, andMinnesota are providing the same services for Canadians, since the Canadiansystem makes it illegal to provide and charge for any medical service, exceptin Alberta.

We are having a debate in the United States about foreign investment in sen-sitive industries. We seem to be more inclined to regulate this sector than mostother countries, with the possible exception of France, which uses it as anexcuse for protectionism. To what extent is this problematic for the UnitedStates? Do the other countries have a better and more flexible way of doing itor do they just ignore it?

GARY HUFBAUER: This is the real face of protection in the United States.In the trade area, it is still talk. In investment, it is action. The next action isgoing to be airlines because the new head of the Transportation Committee in

the House feels that foreign investment in U.S. airlines is a threat to nationalsecurity. The U.S. civil aviation industry has dropped well behind of our glob-al competitors. The Bush administration had some proposals which wouldallow more foreign investment but they will go the way of Dubai Ports11 if theycome forward. That is just the tip of the iceberg. The United States is goingdown the investment protection road for at least the next couple of years.

STEVEN PEARLSTE IN: You noted that U.S. airlines have done poorly interms of competitiveness. That is certainly understandable in terms of service,but what else are you referring to?

GARY HUFBAUER: For example, the networks offered by Lufthansa,British Airways, and Air France are superior to those of the U.S. carriers. Theyare building truly global networks; U.S. firms are much more confined. AirFrance is actually doing better than some U.S. airlines. The United Statesendorses an airline “fragmentation model,” and the financial results of thatstrategy are evident. The United States does not have a single airline, evenincluding Southwest Airlines, in the top 20 in terms of profitability in theworld. Also, U.S. firms are not ordering new aircraft. The damage incurred bythe U.S. airline regulation model is not fully appreciated. It is dragging thisindustry down, globally.

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11. In early 2006, Dubai Ports World, a state-owned company in the United ArabEmirates, sought to purchase a British company, Peninsular and Oriental SteamNavigation Company (P&O), which managed several U.S. ports as well as portsoverseas. The sale was approved by the inter-agency Committee on ForeignInvestment in the United States (CFIUS) but actively opposed by others on the basisthat it could compromise foreign security. Dubai Ports completed the purchase ofP&O, but subsequently sold the management contract for the U.S. ports.

JOHN CRANFORD: Several of the participants in this conference havestudied and written about competitiveness for the last twenty years and the sub-ject is rightfully back at the forefront of public debate.

CARL DAHLMAN: Looking at the economic shares of the world in termsof purchasing power parity (PPP), China is currently the second largest econo-my. Using the growth rate for the last 12 years to estimate where countries maybe in the near future, China will be as large as the United States by about 2011.This is before the adjustment in China’s GDP as a result of revaluation in 2005,when they realized there was more of a private sector than they had thought,especially in the services sectors.

India is currently the fourth largest economy in PPP terms, and by thatmeasure, it will become bigger than the third largest, Japan, by the end of 2007.In other words, these are two very large economies, measured in terms of PPP.

In terms of real dollars, China is now the third largest exporter of mer-chandise goods in the world. Estimated at the rate countries’ exports have beengrowing for the last five years, China’s merchandise exports will be bigger thanthe United States by the end of next year, and will catch up to Germany byabout 2009.

A big caution: projections cannot be based on historical trends. These arethought experiments of where these countries are going. Situations change fre-quently and we are often wrong, so this is just to demonstrate the economic sig-nificance of these large economies.

China has recently made significant investments in education. As recently as1997, China had an enrollment rate of 6.5 percent; now it is up to 21 percent.

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As of 2005, it had the largest tertiary education system in the world. China hasmore students at the tertiary level than the United States, and forty percent ofChina’s students are in math and science. The quality is still low, but they areinvesting very quickly in improvements.

On the R&D side, China has also been ramping up its investments. Again,in PPP terms, the United States is the biggest, followed by Japan. But Chinahas been increasing its funding of R&D as well. In 1998, these investments rep-resented about .8 percent of GDP. Last year, China spent 1.4 percent of itsGDP in R&D. Some quick calculations would demonstrate that China mayvery well be spending as much as Japan in PPP terms by the end of 2006.

These projections are indicative of where China is headed. The key point isthat China has been very effective at tapping into global knowledge throughtrade, copying, and reverse engineering through foreign investment. Now Chinais beginning to invest on its own account. The investment is still quite inefficient,but China is improving very quickly so it will be more competitive on innovationtoo. China’s strengths are its very large market and its very rapid growth.

China’s savings rate is about 42 percent of GDP. That makes a big difference,although it may not be invested very efficiently. China has been really good at tap-ping into global knowledge, including using the Chinese diaspora. China is inte-grated into the world economy and has become the world’s manufacturing base.Of the large economies, it has the greatest structural integration in terms ofimports and exports. China also has a large supply of excess labor; it can bringabout 200 million people in the rural sector on-stream, so wages can remain lowfor a long time. The country is moving up the value chain very rapidly because itis able to do a great deal independently, in addition to the benefits that it derivesfrom tapping into global knowledge. China is also very efficient on export tradelogistics. Almost any of the Chinese ports can place merchandise in the UnitedStates much more cheaply than even Mexico.

China is also investing heavily in R&D. The strong investment in educationand R&D are driven with a big sense of national purpose.

But China also has big challenges. The country is dealing with increasingincome inequality, limited natural resources, and big environmental problems.China is also very dependent on the global market. If there is a global turntowards protectionism it is going to be in significant trouble because Chinadepends so much on the global markets. China has a very weak financial sec-tor. There is also a tension between the transition to a decentralized economicsystem and a one-party system of government.

The speed, scale, and scope of China’s rise in the international system isunprecedented in history. South Korea’s export expansions have been thefastest, but China came from a bigger base, so the impact it is having on theworld is much bigger. China has done this by plugging into the global systemvery effectively. It has tremendous economies of scale and specialization.China is also adopting many new elements of competition, education, inno-vation; also in information and communication technology, and in tremen-dous improvements in connecting to the global system.

U.S. consumers are benefiting from the reduction in the cost of manufac-tured products and it is helping to keep inflation down. Also, the Chinese arepurchasing U.S. treasury bonds and that keeps interest rates down.Companies competing with Chinese imports feel the increased competition,but if they relocate to China, that allows them to remain competitive global-ly. There is a lot of potential to sell to China, and the United States is bene-fiting more than most of the other countries because it is the most dynamic,adjustable, and innovative. It is able to move up the value chain and innovatebecause it has the most flexible economic system. Europe is going to have alot more trouble.

On the negative side, there are many regions with a concentration ofindustry, which are going to be hurting as China continues to expand, notjust in labor intensive goods but in medium manufacturing as well. U.S.manufacturing workers will face a lot of pressure from low Chinese wages andincreasing productivity. Knowledge workers will also feel the challenge, andnot just from China, but also India, because now we have tremendous possi-bilities for communicating and conducting business through the Internet.Anything that can be digitized can be done abroad. The friction with Chinais going to increase over the exchange rate, intellectual property, access to nat-ural resources, energy, in particular, and of course, in geopolitical influence.

In terms of the bigger global picture, part of what is going on for theUnited States is that other countries such as China and India are catching upin terms of their relative R &D investments, education, and Information andCommunication Technology (ICT) infrastructure. Also, multinational com-panies are now coming from Europe and Asia. As a result, there is a bit ofconfusion over which companies are owned by whom, since there is stockownership from all over the world. Countries are grouping into regionalarrangements to compete with the very large U.S. market, even though thathas become less important because of trade liberalization and globalization.

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The United States, which is extremely vulnerable with its very large fiscaland trade imbalance, is neglecting necessary investment in infrastructure, andin maintaining flexibility to re-deploy assets to a more competitive use, and alsoits economic leadership. There is also going to be growing tension over thegrowth and the strength of global multinationals which are operating for theprofit function of the stockholders, which is perfectly appropriate. But theirinterests may be very different than those of the workers in particulareconomies, and that is something that should be more closely examined.

In the big picture, there are two major components to a lot of global restruc-turing: one is the unbundling of things that could be produced and factories goingoffshore and the other is the unbundling of tasks because of what can be donethrough ICT. The implications of this latter development are that the returns tolabor in developed countries are decreasing because of the doubling of the globallabor force. Richard Freeman at Harvard estimated that with the entrance of thenew emerging countries, such as China, India, and former Soviet states, the totalglobal labor force in globalization is twice as big as it was before. So the returns tocapital are increasing. There is more labor. Job security is decreasing. Then there isthis distinction between the big agents of globalization—the multinationals—andthe national interest of the home countries of those multinationals.

Some of the implications for the United States include the need to increasethe flexibility of the economy to constantly restructure and adjust to the shocks;reduce the fiscal and trade imbalances; increase the innovation effort; and thenwork on the entire education system. Education is fundamental. It gives flexi-bility. But higher education and knowledge workers are not protected in thisnew, more dynamic world environment where the new element is the potentialto do many things at a distance. In terms of skilled labor, especially in the ICTsector, there are many things that can be done much more cheaply in India, thePhilippines, China or the former Soviet states.

This also implies that it is very important to focus on strengthening socialsafety nets, which are very weak here. That includes unemployment insurance,job retraining, and health insurance. This will be a big issue. It was alreadybrought up in terms of increasing inequality. The United States also has toimprove its global image. It has made a lot of enemies and drawn a lot of fire,and that is going to be a big problem in terms of its geopolitical position.China, despite of all the competition emanating from it, needs to be considereda partner in this very unstable world because it has a great deal at stake in theglobal system.

BRYAN RITCHIE : The Southeast Asian countries that I am discussingtoday have not been traditionally perceived as a threat to the United States. Butthere might be something that the United States could learn from these verysmall and very different economies that might be interesting, so I want to dis-cuss Southeast Asian development strategy, a little bit of its history, and then alittle bit of these countries’ current strategy.

For a long time, people considered Southeast Asian countries in terms of aflying geese analogy where they were following Japan, Taiwan, and Korea. Butthat analogy does not really work very well for a number of reasons. There werea lot of changes in the global system that made it virtually impossible for thesecountries to implement the same kind of industrial policy and the same kind ofprotection. There was not the same market access in the United States, so theywere forced to adopt very different strategies. At first, they tried the import sub-stitution route, but being very small economies, the markets did not supportthat approach. However, when the United States forced Japan to restructure itsexchange rate in the Plaza Accords in 1985, there was a massive shift of capitalout of Japan and into Southeast Asia. This was probably for contiguous reasonsprimarily, but also because of a fairly well-educated labor force, low-wage labor,and manufacturing.

The United States and Europe followed fairly rapidly, and there was a mas-sive influx of FDI into these economies. They rapidly shifted their focus toopen markets. These Asian countries were certainly doing this long beforeChina was. Put together, the Asian Four (the Philippines, Singapore,Malaysia, and Thailand) are approaching 300 million in total FDI inflowsover the last thirty or so years. Compare that with China, which has certain-ly eclipsed and passed them, but there is still a significant amount of FDI thathas gone into this region.

The results have been very impressive. These countries together have aver-aged better than six percent GDP growth per year, including the years of thefinancial crisis. By the late 1990s, all of these economies had better than fortypercent of their exports made up of high-tech exports. In the case ofSingapore and Malaysia, those numbers are 70, 80, and approaching 90 per-cent. Thailand has become known as the Detroit of Asia. For example, all ofFord’s production for markets outside the United States is based in Thailand.Malaysia, Singapore, and Thailand produce the large majority of the harddisk drives that are in your computers. They also do a large amount of man-ufacturing of computer chips.

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However, in the early-1990s, technological capacity began to diverge. Whathas become pretty apparent is that oftentimes, and especially from an econom-ic perspective, technological deepening and upgrading with growth are equat-ed. In fact, those are two very different things. Singapore clearly diverges fromMalaysia and Thailand in terms of this technological capacity. For example, in1970 the three countries had a similar base in terms of R & D as a percentageof GDP; Singapore now invests a percentage that is very similar to developedcountries’ investment of over two percent. In 1966, Malaysia and Thailandwere still struggling down in the 2-2 level; they are now up to about a little overa half of one percent. Researchers per million capita are a similar thing here.The Singaporeans are closer to the developed countries, and Malaysia andThailand are still struggling to increase the number of scientists and engineers.

This is where the United States could learn something. The differencebetween these economies is the approach that Singapore took. Being forced toplay in a global economy, they were very interested in opening their economy.But at the same time, they realized that they needed to take a techno-nationalistapproach to creating intellectual capacity, in other words, to creating knowledgeand innovation. This is a coordinative type of state relationship where they weretrying to leverage technology from the foreign firms and make it their own.

This has resulted in the state creating coordinative linkages between firms,government agencies and departments, organized labor, and academia. It is thefocus on improving national technological capacity that has resulted in a veryinteresting outcome. It is different from Ireland, for example, where Microsoft,for instance, takes its R&D facility to Ireland, but the R&D capacity, technolo-gy, and intellectual property is still owned by Microsoft. In Singapore’s case, thestate has actually created the mechanisms to move that technology out ofMicrosoft and into the local economy.

Singapore did this in a number of ways. For example, it created incentivesfor global firms to help create industry within Singapore. One of the industriesthat has done very well is precision engineering, a unique area, but one that isapplicable across a number of industries.

When Singapore first began trying to attract new industries, one of the firstcompanies the government contacted was a German company named Rollei,which was an optics manufacturer. Rollei indicated that while there was inter-est in going to Singapore, the country did not have the skilled human resourcesthey required. Singapore’s governor offered to cover all the costs of the trainingall the engineers that Rollei would need if they would train twice as many. In

return, Singapore would retain the second set of trained engineers. Rollei agreedto the arrangement and once the training was completed, the extra engineerswere transferred into the Institute for Technical Education system, which beganproducing even more precision engineers for optical capacity. Then Singaporeapproached other companies with their newly trained human capital in preci-sion engineering in optics. They ultimately attracted companies such as Seagate,IBM, Mac Store, and Hitachi, all of whom went to Singapore because they dis-covered that precision engineers in optics were very good for hard disk drives.

Singapore has now replicated this strategy in a number of ways, and they con-tinue to use it over and over again. But this is fundamentally about moving thetechnology out of the firms and into the country. They have done this in a num-ber of ways. For example, Singapore has created mechanisms that connect themultinational corporations to local firms for R&D upgrading. They have con-nected the government and firms to research and development. One great exam-ple of this was Seagate, where Singapore again covered the cost of training theengineers. Seagate then moved one of its R&D facilities there. Then Singaporealso created options to move that technology out of the R&D center and into aresearch center, where they established a partnership with the National Universityof Singapore to undertake basic research in thirteen different areas. One of thoseareas was data storage, and they have developed a number of advanced materialshandling all kinds of different areas in which they have a focus.

This is not the industrial planning that took place earlier in East Asia. Thisis really about picking broad areas and then letting champions emerge. There isno nurturing going on in Singapore, like there was in these other developmen-tal state economies. Singapore is coordinating this, but it is also getting the mar-ket to participate and it is bringing them to the floor. Singapore’s leadership isin making these things happen.

Thailand and Malaysia, on the other hand, have not gone down this samecoordinating type of path; they have really followed the “Washington consen-sus” liberal open market economy. But this has positioned them and caughtthem in a structural squeeze in which they are neither price competitive on thelabel with China nor intellectually or technologically competitive withSingapore or the other countries. This puts them in a very tough situation andhas resulted in some very strange policies. In some cases, they are trying to sup-press labor; in other cases, they are trying to force technological development.But as we know, innovation and technological development is a very creativeprocess and one that is very difficult to force from a top-down position.

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50 | Panel II

These policies have led to a backlash to globalization in some of these countries.In Thailand, for example, the king has put forth the idea of sufficiency economics,which is very ill-defined. It is difficult to understand how to get sufficiency eco-nomics without some level of protection, so there are some real conflicts in someof these countries about how to move forward.

One of the big, interesting things for me is how some of the lessons that welearn in these small, developing countries may be applied to the United States.There are not very many lessons we can take on a national level, but on a state levelthere is a lot to learn. I’m from Michigan, and right now Michigan has the high-est unemployment rate in the country. It has a declining automobile manufactur-ing sector, and a very difficult transition process for moving out of second andthird stage manufacturing to more third and fourth stage upgrading to the tech-nological and knowledge-based industries.

However, the problem here is that Singapore has a very strong state and thushas an ability to coordinate. We have, in turn, very high levels of fragmentation.This leads to very murky visions in entrenched institutions and cultures that aredifficult to overturn without some sort of top-down coordination. But even seeingthat top-down coordination, it is very important to understand that implementa-tion comes from the private sector, academia, and labor. For example, labor’s rolein Singapore is very different than it is in the United States. Rather than collec-tively bargain for wage increases, very early on it was clear that any wage increaselabor won would come from increases in productivity. So Singapore’s governmentgave labor the responsibility to improve skills and labor’s focus is on skills improve-ment because that is where the productivity upgrades and wage increases occur.

At that point, we might think about ways to create this vision and this focusand ways to change institutions. The political structure is going to have to bea key component of that as well, and maybe that leads the teacher to becomethe student.

JOHN CRANFORD: Carl Dahlman brought up the point of the tensionbetween the interests of multinationals in China and other developing coun-tries and the United States, or in other words, the tension between the interestsof those companies in China and the U.S. national interest. What kinds ofthings do you think the United States could do to more closely align corporateinterests with U.S. national interests? What do the other countries we have beentalking about do to align multinational interests with their goals?

CARL DAHLMAN: The multinational corporation is the biggest agent ingenerating applied knowledge. Over fifty percent of all R&D conducted global-ly is by multinational companies. They are operating globally and trying to max-imize profits. They want to apply that knowledge on the biggest possible scale.Knowledge is not consumed in its use, and they are going to wherever the bestopportunities are located; they go where they can find good assets and good mar-kets. They are looking at a globally integrated company. The article by SamPalmisano in Foreign Affairs (June 2006) explains that very clearly.

The problem is that in a global economy when different assets are placed indifferent places, there is tension between the profit objectives of the multina-tionals which is perfectly reasonable—and each nation-state’s point of view andobjective regarding employment or maintaining high-value jobs. What is hap-pening right now is that many types of jobs, including manufacturing and highknowledge jobs, are being outsourced from the United States to places all overthe world. China is receiving a lot of that offshoring, not just with manufac-turing jobs, but also with the service jobs that can be done digitally. The multi-national company is going to go wherever it sees the best opportunities, and itis also putting in place a great deal of R&D outside its home country. For exam-ple, there are now 800 R&D labs owned by multinationals in China. There are200 such multinational labs in India. This is part of the fragmentation of thedifferent tasks. But from the point of view of the domestic economies, there isa lot of labor that is not being used. The question then is where will this excesslabor be absorbed? Are there going to be more productive jobs for these dis-placed workers?

There is really no simple solution to this problem. I am just pointing outthis tension. The multinational is the most important agent in generatingwealth and distributing it, and so there is this inherent tension. However, sev-eral policies can be helpful. These include the retraining of workers, taking offthe load of some of the pension and Social Security costs, and also revisingimmigration policies in the U.S. case to continue to make it attractive to hireimmigrants in the United States and to be able to train them with necessaryskills. These measures, and the broader issues of fiscal policy and the govern-ment budget need to be addressed.

T.N. SRINIVASAN: India, for the first 30 or 35 years, viewed multinational com-panies as exploiters and did not welcome their establishing enterprises withinIndia. This has all changed, but selectively; in the case of the information technol-

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ogy and the IT services sectors, the welcome mat is out. Indeed, many of the for-eign enterprises are not only establishing themselves earlier on the low-end infor-mation technology, but now extend their activities to high-end researching, devel-opment, and engineering services. India is becoming a destination for multina-tional enterprises, but this trend is not pervasive throughout the sectors.

One area where it could make a difference is in the service sector. For exam-ple, India has been extremely reluctant in opening the retail trade market forforeign investment. Instead, they want to encourage domestic large enterpris-es to establish their own retail domestic firms to open retail chains. Then, oncethere is a domestic competitive capacity to face up to the multinational firms,they are sequencing the entry into the retail trade.

In the financial sector, there is some reluctance to expand the presence offoreign banks and foreign enterprises. This is very much the case to keep thefinancial system as much as possible in the hands of domestic ownership. Inthe industrial sector, India is opening up like China in manufacturing, inareas such as auto components, auto sectors, and telecommunications. Anumber of multinationals have come in and established facilities. Here again,Indian policy has been selective. I do not know whether India has the capa-bility, and I doubt whether any government has the capability to look far intothe future and pick winners, but they believe they can pick winners and theyare being selective.

BRYAN RITCHIE : Thailand, Malaysia and Singapore are in a differentposition than these larger countries. They have always had the welcome mat outfor multinational corporations, but they are still trying to protect their localindustries in banking, telecommunications, and other industries as well.Malaysia and Thailand, especially, put a lot of stock into the idea that if theseforeign multinationals came, the technology would naturally transfer into soci-ety. When that has not happened, there is a lot of skepticism about their value.

Now there is pushback against some of this. Singapore took this activeapproach and has been fairly successful. These other countries have not experi-enced the same level of success. It will be interesting to see how this plays outgoing forward, but that is certainly a difference. They also do not have a mar-ket. These multinational companies do not make Thai products the way theymake Chinese products, Indian products, or other things, so there is not thatsame sort of incentive for the companies to share technology.

JOHN CRANFORD: What is the decline of rural poverty, particularly inChina, from 30.7 percent in 1978 to nine and a half percent in 1990 directlyrelated to, and is it attributable to the opening of China and economic growth?

Also, with the potential for a rise in income equality, will political and eco-nomic tensions develop? Is this decline in poverty going to change?

CARL DAHLMAN: As China began to open up to the rest of the world byjoining the WTO and integrating into the global economy, two to three hun-dred million people moved from the countryside to the coastal provinces towork in export-oriented manufacturing. This was one of the biggest migra-tions in history. This is what has raised the per-capita incomes and reduced thepoverty rates. This kind of transformation has not happened in India becauseit has not had this big integration. India has been very limited to just a fewsmall islands based on the ICT sector, as T.N. pointed out. That is a very bigdifference.

Income inequality is increasing very rapidly in China. The Gini coefficientin 1990 was about .33; now it is about .47, so China has become more unequalthan the United States in the space of 15 years. The projection is that if thiswere to continue, then China would experience serve income inequality. Thisis a potentially destabilizing situation because there is tremendous TV penetra-tion in the countryside. Rural people can see what is happening. People arebecoming billionaires almost overnight through special relationships with thegovernment and with foreigners. Even though income in the poorer areas ofChina has been going up slowly by one to three percent, the wealth of thecoastal areas grows at 15 to 20 percent. There is relative deprivation. This is oneof the big concerns of the Chinese government, which is related to concernsabout the political transition.

T.N. SRINIVASAN: In India, agriculture was not at all the focus of thereforms in 1991. The opening of agriculture to international trade is still relative-ly limited. And India’s stance in the WTO negotiations also is not exactly one ofgreater opening of Indian agriculture. So you don’t expect that much of an impacton rural areas and rural poverty with such limited opening. The data show thatreduction in rural poverty has not been that extensive.

But that said, there is also concern that, just as in China, coastal regions aregrowing much faster. And with the growing labor migration from the ruralareas in India, there are also substantial regional disparities in growth. But as

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Carl pointed out, India is not really a single common market, and there aremany internal barriers. The movement of labor from agriculture into fast-growing towns and states has not happened to the same extent in India. Butmy view of inequality is somewhat different from Carl’s, in the sense that it isnatural that when you open up an economy you create opportunities. But notevery person, every region, nor every household, not every town is equallyplaced when you begin the opening to take advantage of the opening, so it isabsolutely natural that the disparities widen initially. If they didn’t, in my view,your reform has not succeeded.

So the question to be asked is whether there are processes that will enablethose who were initially not in a position to take advantage of the opening tocatch up. So that’s the question that one should ask, not about increases ininequality. India being a democracy, there is electoral competition, and the peo-ple provide signals that this is not where you should be going, and where youshould be going. In the Indian case, far more attention is being paid now toagriculture in rural areas. But China is not a democracy. Who knows what willhappen? But in India, at least, there is a safety valve of democracy, which willcorrect extremes developing.

BRYAN RITCHIE : Inequality is certainly a problem in smaller countries aswell, and they’ve been doing this FDI longer. And there doesn’t seem to be anyconvergence back toward equality in these countries. In fact, Thailand had thehighest per-capita ownership of Mercedes Benz in the world up until 1997. Sothere’s certainly these problems. Although Thailand is also a democracy but whenthe government gets a little too strong, the king says, “All right, let’s have a coupand we’ll just remove them and then we’ll go back to democracy.” So there’s insta-bility. It’s hard to say whether that’s just a rearranging of the deck chairs or whetherthere’s something deeper going on there. But this is certainly a problem.

JOHN CRANFORD: Does the rise in inequality help the United States’efforts to sell to these emerging economies?

CARL DAHLMAN: It does. China, for example, has very unequal incomedistribution. In terms of PPP, income per capita is about $5,000. The top tenpercent of the population earns a per capita income of $18,000. That is a verysignificant market of 130 million people. The next ten percent below is about260 million people making roughly $12,000 per person—a large market.

JOHN CRANFORD: So for U.S. exports, maybe we ought to be moreaggressive?

CARL DAHLMAN: Yes, and this is why the auto industry is going gang-busters in China at seventy percent growth per year. People want access to carsand have the income. There is a growing class of people with a sufficient level ofincome to participate in the market. It is a very lucrative market now but it cre-ates other problems in terms of some of the effects on the society, for example,increased pollution in the case of the rapid expansion of the auto industry.

T.N. SRINIVASAN: The same thing is true in India where there is theemergence of a so-called rising middle class, estimated to consist of 150 millionto 250 million people. This creates a huge market for products that the UnitedStates and other developed countries produce. But much more in the case ofIndia than perhaps in China, the U.S. culture is influencing the choices thatindividuals in upper income groups make. And whether it is good for them orgood for the economy, I don’t know.

JOHN CRANFORD: Does revealed comparative advantage, a method usedby economists to determine competitiveness by calculating a country’s exports ofa specific category as a percent of trade in all products, a good benchmark todetermine where the United States should specialize in trade with China? I sup-pose that could apply as well to the smaller countries in Southeast Asia.

CARL DAHLMAN: It is a start, but it is a very imperfect measure because,for example, in terms of the revealed comparative advantage, it depends also onthe input/output matrices having to do with the different sectors. For example,there is a very high percentage of high-tech exports from many of these EastAsian countries. But they are importing all the components and assemblingthem, so the real technology value there is very low. You have to be careful whenyou look at the figures.

The numbers do give you a good understanding of where there is a broad-based capability, and it gives you a sense of where one might build on that. Forexample, cluster policies might help to strengthen the key factors that are nec-essary to move them forward, including the links to R&D, education, and alsovery importantly, creativity. This goes back to the question on entrepreneur-ship and creativity.

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T.N. SRINIVASAN: I am not a great fan of revealed comparative advan-tage, devised by my late friend Bela Balassa. It is a backward-looking notion. Itis not a forward-looking notion of where your comparative advantage is likelyto lie in the future. It only tells you what it is that you have done in the past,good, bad or indifferent, that has resulted in the particular trade pattern thatyou observed. I am not at all sure you can learn anything useful by looking atthe static notion of revealed comparative advantage.

JOHN CRANFORD: Corruption is a significant problem in China and inIndia. Will it become worse? What is the macro effect going to be?

What about this other overhanging geopolitical problem of terrorism? Isthat going to be a problem in these countries?

T.N. SRINIVASAN: In India, terrorism was a problem long beforeSeptember 11. The United States woke up to terrorism too late, while India hasbeen facing it for decades. That is a problem and an increasing concern. India’sassessment is that a large part of it originates from its neighbor,Pakistan.Whether things are going to change for the better remains to be seen.The foreign secretaries of India and Pakistan have been meeting with each otherto push the dialogue further.

CARL DAHLMAN: It is clear that there is corruption in both countries anda problem that sometimes gets more and more attention and visibility, and thengets out of hand. China, historically, had periods where rulers became verygreedy and started to use the government’s assets for their own interests, andthen the people revolted. In the case of a one-party system, which China hasright now, they have to be very careful because if there is a widespread percep-tion of corruption, there will be a lot of popular discontent. This is why theyhave periodic cleanups, and the death penalty. They have even executed gover-nors. This is part of the centralized governance system.

Terrorism has not been such a big problem in China because there is morecontrol and there is very strong control of the Internet. This goes back to theissue of inequality and instability. China, in reforming and privatizing the state-owned enterprises has been firing ten to fifteen million workers per year. Theseare organized urban workers. Imagine how destabilizing this kind of situationcould be if the workers were very unhappy, which is why they worry so muchabout the Internet.

They also use the Internet a lot. They understand that it reduces transac-tion costs for economic activities, which is great. Of course, any political asso-ciation or assembly that might threaten the continuity of the one-party sys-tem is immediately clamped down. That is the system.

BRYAN RITCHIE : All of these countries are characterized by a certaindegree of corruption. The problem I have with corruption is that it’s very dif-ficult to know exactly what its influence is. We would all agree that the lesscorruption there is, the better. But Korea, Taiwan, and Japan were very cor-rupt as they grew. Part of the question must consider what kind of corruptionit is, where it is, how it is operating. Indonesia, the largest Muslim country inthe world—and Malaysia, also a large Muslim country—have remarkably lit-tle terrorism even without strong state control.

CARL DAHLMAN: One more thing on the issue of corruption: one of thethings that must be understood about China is that the whole incentiveregime of this one-party system is based on performance of the local author-ities— municipal, provincial and central—in terms of implementing effectivegrowth policies. That is what drives the efficiency of the system, and thatleads to some kind of accountability. Then leadership is rotated. This makesa big difference given that this standard is driven by a focus on accountabili-ty for economic performance—whereas in many other places, including indemocratic countries, such a focus does not exist.

JOHN CRANFORD: There are no lawmakers in this room today, whichis not a surprise. Congress and their staff do not seem to fully appreciate thespecific problems in China. Maybe in India; maybe in Southeast Asia. AVietnam trade pact went down the other day and there are concerns with theIndian nuclear pact. Some senators are still advocating punitive tariffs for cur-rencies. How bad is the misunderstanding on Capitol Hill, and what can bedone about it? That should be the focus for another conference.

T. N. SRINIVASAN: Paul Samuelson was once asked a question byStanislav Ulam, a mathematician who had worked on the Manhattan Project:“Name one proposition in all of social sciences, which is true and nontrivial.”Paul Samuelson replied, “Comparative advantage.” This proposition wasenunciated nearly two centuries ago, but I do not know whether the

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Congress’ knowledge about comparative advantage has advanced at all. Thatis where the problem lies.

58 | Panel II

Peter G. Peterson a

I know you are focusing today on renewed competition from not just Europeand Japan, but in particular, the rising economic powers of China and India. Itseems to me that around the world other countries are learning the lessons thatwe taught them about the tremendous importance of capital investment inhuman investment, infrastructure, education, science, and technology to buildtheir comparative advantages.

This country faces a series of long-term challenges. Several of them are closeto unsustainable, which unfortunately have one thing in common: we’re large-ly ignoring all of them.

Our entitlement programs are one example of a long-term and unsustain-able challenge that threatens to consume staggering percentages of our GDP,not for investment, but basically for consumption. This is spending essentiallyon consumption, on the past, and on old fogies like me. It is not an investmentin the future.

Over the next 35 years, when 78 million baby-boomers, twice the currentgeneration of the elderly, retire, a mid-case forecast is that spending will increaseby about nine percent of the GDP. That may not sound like much to some peo-ple, but that is nearly three times what we have been spending on defense. TheConcord Coalition estimates that entitlement spending plus interest will con-sume the entire federal budget in only 15 years.6 In other words, these numbers

6. The Concord Coalition is a nationwide, non-partisan, grassroots organization advo-cating generationally responsible fiscal policy. It was founded in 1992 by the lateformer Senator Paul Tsongas (D-Mass.), former Senator Warren Rudman (R-N.H.),and former U.S. Secretary of Commerce Peter G. Peterson. See http://www.concordcoalition.org.

60 | Peter Peterson

demonstrate that if we fail to deal with entitlements, the other cherished feder-al programs that we talk glibly about are likely to be decimated.

It may help explain why we have conferences like this and we unanimouslyagree on the critical need to invest in research and development, and it’s a com-petitive imperative, it seems to me. But the reason, perhaps, that we don’t domuch is someone might ask the rude question, “Where are you going to get theresources for that investment?”

You may not remember that in 1960, five percent of the federal budget wasinvested in basic research and development, which has been a very importantsource of major breakthroughs such as the Internet, to take one recent example.Today that number has fallen to only two percent of the federal budget. Onecould therefore argue that the crowding out of vitally needed investments inbasic R & D in this country has already been happening. Senators Alexanderand Bingaman have spelled out a number of specific steps for funding R & Dand improving our entire education system.

I want to step back from those specifics to emphasize the critical importanceof dealing with our overall series of deficits and debts that inevitably will erodethe political and economic power of this country, which has led the world forsix or seven decades. But I do want to come back and focus on the rude ques-tion, “Where are we going to get the resources to make the critically importantand needed investments that the Senators speak of?” These steps are going to bevery difficult and they will require public understanding and political courage.Washington, the great political town, is much more aware than I am of the par-tisanship and gridlock that has paralyzed this country’s ability to deal with thefuture. I am going to leave that problem to the Beltway pundits in Washington,because I am convinced that even the most enlightened political leadership willnot succeed by itself.

I would like to focus today on a new generation of business leadership that—as politically incorrect, if not terminal—as this may sound, will demand somemodest level of sacrifice on the part of all of us. There is a tremendous need forfarsighted and courageous business leadership, and for the willingness of allAmericans to step up to these challenges. In short, I hope that business leadershiphas not become the newest oxymoron. I have been very troubled by the criticismsof such serious journalists as David Wessel of the Wall Street Journal, and ThomasFriedman of The New York Times. Friedman declared businessmen to be MIA, orMissing in Action, on the major long-term issues that are confronting our econ-omy. Wessel simply asked, “Where have the business statesmen gone?” Are these

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critics, and people like myself, being romantic? Have there ever been many busi-ness statesmen who took some real responsibility for the future?

I am old enough now that my memories go back to the years just after WorldWar II. At home, we were managing the transition from a wartime society,including the demobilization of 19 million soldiers. Abroad, we were trying torebuild a shattered world economy, devoid of rules or institutions. The 1930shad been defined by a depression and by isolationism. Yet, the list of initiativessuccessfully undertaken and led by a hearty band of business leaders is breath-taking: the Employment Act of 1946, the Bretton Woods Institutions, and theMarshall Plan. When the Marshall Plan was announced, only 14 percent ofAmericans approved; they wanted to stay home. Then these business leaders leda massive public education effort, and America changed its mind. How do Iexplain, if I am correct, the lack of today’s business leadership?

When Henry Kissinger and I were in the White House,7 he once walked intothe press briefing room with a simple question: “Does anyone have any ques-tions for my answers?” I thought that was pretty good. You had to be in thatWhite House to understand that you had to have your sound bytes. It did notmake any difference when anybody asked; you had to get those sound bytes. Itwas pretty relevant to the Nixon administration, at least.

One might begin today by asking the question: does business have sufficientclout today to make a real difference? The answer to that is yes. One need onlylook at so many of their impressive legislative achievements.

I look elsewhere and ask you and the business communities the followingquestions: has business become so hyper-competitive, so global, so demanding,so focused on corporate governance that it feels it has little time left for any-thing else? Have recent corporate scandals left CEOs feeling so morally crippledthat they feel they lack public credibility? Do the executives worry that the “gotyou” media will defame us if we stick our heads up? Do they feel thatWashington is so relentlessly vindictive and polarized at the present time thatwe fear retribution if we occupy a lonely but centrist and sensible position? Hasthe anonymity of the non-citizen become the best executive policy? Did the bigparty in the 1990s, when all of us were getting fat, rich, and happy, leave CEOscaring less about standards of behavior in the future? Do our stock markets so

7. Peter G. Peterson was U.S. Secretary of Commerce from February 29,1972–February 1, 1973.

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discount the future that we assume we are judged largely by short-term results?Finally, are CEOs saying to themselves, “If my tenure is down to only four or fiveyears, let somebody else worry about our collective future.”

There is a shortage of business leadership, but there is most certainly no short-age of daunting and unsustainable long-term challenges that are screaming out forbusiness leadership, indeed, for all kinds of leadership. Herb Stein,8 our onehumorist in the Nixon administration, once said if something is unsustainable ittends to stop. We have several challenges of that nature that are unsustainable.

My friends would tell you that I have relentlessly, cruelly bored them and oth-ers with my railings about entitlement programs for the elderly. I have tried andfailed to make clear that the trust funds are a fiscal oxymoron; they should not betrusted and they are not funded. The money has already been spent, and evenWashington cannot spend the same money twice. Therefore, while the politiciansand bureaucrats anesthetize us with soothing soporifics like, “the Social SecurityTrust Fund will keep us solvent,” for the next 30 or 40 years, official projectionsare that your and my children and grandchildren, (and I have nine), confront pay-roll taxes of 30 percent, which is double of what we now pay for Social Securityand Medicare. Can we honestly call that solvency? Do not listen to those that tellyou we can grow out of these entitlement problems.

The Comptroller General of the United States, David Walker, essentially thechief accounting and auditing officer of the country, has said that under plausibleassumptions, to grow out of our entitlement programs would take about 20 per-cent annual growth for seven decades. That is clearly totally unrealistic.

Pronouncements from an investment banker on morality do not come con-vincingly. Still, however unconscious our denial, or however irresponsible ourparalysis, slipping this huge hidden check to our own children and grandchildrenfor our free lunch is immoral. Dietrich Bonhoeffer, the German theologian, oncesaid that the ultimate test of a moral society is the kind of world that it leaves toits children.

Healthcare costs are the main cost metastasis. After spending just over twice asmuch per capita as the rest of the developed world, we have remarkably little toshow for it. We have barely begun to even ask the fundamental, but awkward ques-tions of how to reduce these unsustainable healthcare costs. For example, how do

8. Herbert Stein was appointed to the Council of Economic Advisors on February 4,1969 and served as Chairman from January 1, 1972 to August 31, 1974.

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we tolerate an out-of-control, open-ended Medicare system, where some localitiesin the United States have six times the back surgery, and others have six times theprostate surgery than in other areas? The blue states and the red states are onething, but am I to believe that we have bad back and bad prostate states?

Another unsustainable problem is our trade deficit and its first cousin, the cur-rent account deficit, of a stunning seven percent of the GDP, which is twice theprevious record in the 1980s, when the dollar fell by a third. This unsustainableand dysfunctional dependence on foreign capital implies daunting risks that nogreat country should take. This is one reason that virtually every economist is veryconcerned about the precipitous drop in what they call the net national savingsrate. You may be surprised to hear that only 40 years ago, it was 11 percent ofGDP. It is now less than one percent. Thus, there is widespread agreement that wemust increase this country’s savings, so that we are not so dysfunctionally and reck-lessly dependent on foreign capital.

But if we are to shrink the deficits, there are only three sources of revenue wecan tap into: we can increase corporate earnings, but they are already at record lev-els. We are going to have to depend on doing something to reduce our budgetdeficits that, after all, represent negative savings or government dis-savings. We arealso going to have to increase, significantly, personal savings. Americans, at the per-sonal level, have gone from being among the biggest personal savers in the worldto the lowest. In 1992, only 14 years ago, Americans saved personally about eightpercent of their disposable income. This year, our savings rate has gone negative,roughly to one percent of our disposable income. The differences between Chinaand the United States on savings are dramatic. Our net national savings rate is onepercent; China’s is 32 percent. Our personal savings rate is negative .7 percent;China’s is 22 percent. Our national investment, which is critical to growth, is 17percent; China’s is 43 percent.

Side by side with our apparent obsession to consume and not to save is ourpropensity to borrow. You might recall a commercial where a man says, “I have afour bedroom house, a new car, and I belong to a golf club. How do I do it? I’mup to my neck in debt.” How much are we in debt? Household debts, as a per-centage of disposable income, are at nearly 14 percent. It is the highest it has beenin decades. For example, when gasoline prices rise and people feel squeezed, 80percent of gasoline transactions are on a credit card. Three years ago, that numberwas only 50 percent. Increasing personal savings has become a national imperative.

Energy presents still another long-term and, at present, unsustainable challenge.The president refers to our oil dependence as an addiction. Our ravenous con-

64 | Peter Peterson

sumption and limp energy policies are major enablers. With less than five percentof the world’s population, we consume 25 percent of the world’s oil, and over fourtimes the gasoline per capita than other developed countries.

Is it a statistical coincidence that foreign countries’ gasoline taxes are on averageten times higher than our taxes? How little we hear about reducing our gluttonousconsumption or how unthinkable it is that we run a $300 billion annual oil importbill that deepens the already deep pockets of some of the unfriendliest countries inthe world, and thereby helps them finance activities very dangerous to our health.There is also the issue of global warming.

No wonder one of the wisest of Americans, Paul Volcker, says, “Altogether, thecircumstances seem to be as dangerous and intractable as I can remember. And I canremember a long time.”9

Given that this talk is about business leadership, I have intentionally focused myquestions on the business community. But what questions might we be asking our-selves as citizens? With modern political democracies such as ours, fixated as we areon the next election, can we deal with silent, slow motion, long-term challengesabsent a crisis? Because if dealing with these problems requires a crisis, it will be avery costly one.

Millions of those in my parents’ generation had not only a shared responsibilityfor the future, but a required sense of shared sacrifice to fulfill that future. If we wereto wage the biggest war in history and provide, for example, for a GI Bill of Rights,they would have to pay for it. No free lunch for them. Today, at a time of balloon-ing deficits, major domestic reconstruction efforts, and shockingly, even at a time ofa protracted and costly war, what are our political leaders asking us to give up? Acontinuing preoccupation of many of my own Republican Party members is howthe Pete Petersons of this world get their income tax cuts made permanent and theirestate taxes eliminated.

We have managed to do LBJ one better. We have guns, butter, and tax cuts, too.Whoopee, I say. One might ask, in this all get-and-no-give political world, has itbecome too politically incorrect to suggest that there are times when some of usmight be expected to give up something for the long-term greater good?

Lady Thatcher was the only Western leader10 who tackled one of these prob-lems that I discussed. Specifically, she addressed the Social Security problem by

9. Paul Volcker was Chairman of the Federal Reserve Board from August 6, 1979 toAugust 11, 1987.

10. Lady Margaret Thatcher is the first woman to be elected Prime Minister of GreatBritain. She served three terms between May 4, 1979 and November 28, 1990.

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eliminating the so-called wage indexing as part of her reform. As a result, GreatBritain is in much better shape on Social Security than any country in the world.I asked Lady Thatcher once, “What do you people talk about at your G7 or 8meetings? Are you aware of the impending cost of the aging baby-boomers in yourcountry?” She said, “Oh my, yes, Mr. Peterson.” I said, “How do you explain this?”She replied, “I explain it this way: they say, that it is not going to happen on mywatch, but on somebody else’s watch, and why should I take the pain for some-body else’s gain?” That is the crisp definition of the challenge we confront today.We seem to want it all, we want it now, and we do not want to give up anything.Have the post 9-11 and weapons of mass destruction traumas left too many of usasking, “Why not live it up now?” We do not know whether we or our childrenwill even have a future.

I call on those of us in business, in particular, to become business patriots, andput ourselves on the line for those policies that we believe will help the long-terminterest of our company, our economy, and our country. Can a successful businessexecutive also be a business patriot? I say yes. But I also call on us as citizens, as par-ents, and as grandparents to share in the sacrifices to meet our shared responsibili-ties for our future and our children and grandchildren’s future. We need a move-ment, so let’s get moving.

QUESTION: How should the United States be addressing the energy challenge?

PETER PETERSON: I am deeply involved in the Council on Foreign Relationsand all of the various presidential candidates come to the Council to speak. Two orthree of them have announced “bold energy policies.” These “bold energy policies”always involve increased emphasis on alternative energy sources. The Iowa governor,who recently announced his candidacy, announced a “dramatic program,” andunsurprisingly, it focused on ethanol made out of corn. I have asked several of thesepeople, “Tell me, who could possibly object to more focus on alternative energysources of various kinds? But have you made a quantitative estimate, in terms of howmuch that would reduce our oil dependency over a reasonable time frame of threeto five years?” The answer, almost without exception on these alternative energies, isa very few percent.

The problem, fundamentally, is there are only about three proposals that are like-ly, in the near-term, to have a very substantial impact. One is clearly an energy orcarbon tax, and there are several forms of that and these could be accompanied by aparallel cut in the payroll tax to make it revenue neutral. Another is much tougherCorporate Average Fuel Economy (CAFE) standards on mileage. The third is

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nuclear power. France now gets 80 percent of its electrical power from nuclear.Japan derives about 30 to 40 percent from nuclear power. We have not built anuclear plant in 20 years.

The energy problem is a classic example of what I am talking about. It is not asthough there are no solutions, but every one of them requires somebody to give upsomething. This problem will probably require several solutions.

I have been very impressed with what happened with the 9-11 Commission,where two very able people, including Lee Hamilton, not only devoted immenseintellectual energy, but a lot of time, to follow up and educate the American pub-lic. Since they were credible and serious people, they helped persuade America,because they appeared on every television show to talk in a serious and thoughtfulway regarding the fundamental problems.

We also have to seriously consider the entitlements problem, because there areso many myths that exist.

Assembling a group of the quality of Alan Greenspan, Paul Volcker, RobertRubin, Sam Nunn, Warren Rudman, and people of that ilk whose integrity isbeyond question, is necessary to not only study these programs, but to help takethe responsibility of helping educate the American people. Also, I’d like to useone of these up or down votes that we use in base-closing legislation. It is longpast time to do that, because while I admire George Bush for bringing up hisSocial Security reform program, my enthusiasm for its specific elements is a bitrestrained. A meaningful result will take an effort of that kind by a presidentwho is trusted and courageous and it clearly requires a bipartisan effort to haveany chance of success.

Take Social Security as an example. If the American people believe that the sys-tem is solvent for 40 or 50 years, why should they worry about it in the kind ofshort-attention span type of world that we have? I hope it does not require a cri-sis, because if we have a genuine crisis, the cost would be much higher than we cur-rently are anticipating.

QUESTION: If we had a credible, blue ribbon commission, which problemsshould they look at first?

PETER PETERSON: I would be thrilled if they tackled one of the ones I men-tioned earlier, such as Social Security and Medicare or energy. The entitlementproblem is perhaps the biggest one, just in terms of the massive resources that itconsumes. I would like to underline my point. When people talk about invest-

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ment, it requires savings. There is a choice between consumption and savings. Ifyou look at these programs that are consuming an additional nine percent of theGDP, on top of everything else, think of those programs in terms of whether theyare consumption or investment. They are very largely consumption.

In other words, Pete Peterson’s age group is not about the future. My grand-children are about the future, and that is why we want to emphasize education andR & D. I would attack those programs because they are the prime example of con-sumption largess in this country.

QUESTION: With the degree of investment that we do have, a great deal ofit now goes into housing. Should we adopt policies that encourage a redirectionof some of those resources into manufacturing or service investments?

PETER PETERSON: People often ask me with regard to the real estate mar-ket, “How is it that people can spend more than they earn?” It seems like a con-tradiction of sorts but they use their assumed housing wealth. This is problematicbecause while housing wealth does represent one kind of savings, you and I needsavings that are investable and usable. The increases in housing net worth are notusable savings to begin with.

I have urged college leaders and academic think tanks to try to understand howwe went from one of the biggest savers in the world to one of the biggest con-sumers and borrowers, because that is a cultural change of deep magnitude. I haveseveral theories. After the Second World War, our plants were thoroughly intact;the rest of the world’s were destroyed. We needed to build demand so that theseplants could be kept busy building houses, selling appliances, and so forth. We dida variety of things because we had an unlimited mortgage interest deduction. Wehad Fannie Maes and so forth to bring down cost.

That may have been an appropriate short-term strategy to get the economygoing, but there is nothing that suggests that this is our primary need today. About43 percent of the new houses are purchased with interest-only loans and withoutany down payments. About 50 percent of the new mortgage applications are forfloating rate or adjustable rate loans. The one thing that concerns me, because wehave been depending on the real estate market to keep consumption going, is ifanything were to happen to the dollar, for example, because of the current accountdeficit and if interest rates were to go up, there would be a very significant effecton this economy. At the risk of insulting the real estate industry, the time has cometo reexamine our priorities, and the future of America does not depend on their

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building that many more houses. Available funds would be much better spent inresearch, development, and innovation.

QUESTION: How would you attack the trade and current account deficits?

PETER PETERSON: There are some things that we need to do, and there aresome things that others need to do. I do not mean to blame the United Statesalone, because the rest of the world has gotten hooked on this dysfunctionaldependence. Starting at home, I think nothing is more important than getting ourfiscal house in order and keeping confidence in the U.S. economy, because the dol-lar depends a great deal on confidence. A lack of confidence can be triggered by allkinds of things: geopolitical events, a stupid comment by a treasury secretary, orany number of imaginable things. We have to get our house in order and alsoincrease domestic savings so that we are not so dependent on foreigners. We haveto consume less, import less, and export relatively more. Now, there is a lot of focusin the world on what the United States needs to do, but there is extraordinarily lit-tle attention paid to what the rest of the world must do.

For example, China’s economic strategy has been essentially export-led. Theyneed to create 20 or 25 million jobs every year for the people leaving the agricul-tural and rural sectors of the economy. China sees this huge export surplus as asolution to their domestic problem, and ultimately, their domestic stability. Thisyear, China is expected to have a nine percent current account surplus, so they aredepending on an essentially unsustainable situation to help them solve theirdomestic problems.

What does China have to do? They have to do the opposite of what we have todo. They have to consume more, they have to invest relatively less, they have toimport more, and Europe has to do much of the same. China is beginning to talkabout that adjustment, but the progress is pretty slow.

The rest of the world has kind of enjoyed this symbiotic dysfunctional part-nership, where Fred Bergsten has described the situation as a new definition ofsupply side; they supply the goods and they also supply the money. That cannotcontinue indefinitely. It is going to require some fundamental changes in theUnited States, but very importantly, it is going to require some fundamentalchanges in their own domestic strategy, toward stimulating their own demandinstead of depending on us.

VINOD AGGARWAL: My focus today will be on three topics. First, I willdiscuss the context of some of the theoretical aspects of new trade theory.Second, I will briefly consider the link between domestic and internationalpolicies. In view of the panel’s division of labor, however, I will mainly focus onmy third theme. In particular, I will examine the costs and benefits of differenttrade approaches in dealing with advanced developing countries (ADCs).

As in many other disciplines, economists are good at building models thatmimic current trends. Despite the view that economic models spring up fromtabula rasa mathematical assumptions, most models in economics often looksuspiciously like lagged variables that simply track real world developments.This is not necessarily bad. After all, completely abstract models that bear noresemblance to reality would not really do us much good in an empirical sci-ence. Yet the problem in my mind is how these models, which may be based ona political agenda, are often portrayed as being pure unbiased science.

Lest you think I am a wild-eyed Berkeley post-modern radical, let me quotefrom the latest edition of the leading international economics textbook by PaulKrugman and Maury Obstfeld.1 In discussing Ricardo and the theory of com-parative advantage they note:

Ricardo knew that repeal of the Corn laws would make capitalists betteroff but landowners worse off. From his point of view this was all to thegood; a London businessman himself, he preferred the hard working cap-italists to idle landed aristocrats. But he chose to present his argument inthe form of a model that assumed away the issues of internal income dis-

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1. Paul R. Krugman and Maurice Obstfeld, International Economics: Theory and Policy(Addison Wesley, 2005).

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tribution. Why did he do this? Almost surely the answer is political; whileRicardo was in reality to some extent representing interests of a single group,he emphasized the gains to the nation as a whole. This was a clever andthoroughly modern strategy, one that pioneered the use of economic the-ory as a political instrument.

The political nature of economic models can hardly escape the attention ofdeveloping countries. Liberal economists throughout the 1950s and 1960sargued that import substitution industrialization (ISI) efforts to alter one’s com-parative advantage, as advocated by economists such as Raul Prebisch, wereabsolute folly. While I would hardly call ISI policies a success, all governmentpolicies of promoting industries such as those followed by Japan and SouthKorea were tarred with the same critique. Yet when Japan and Korea becamesuccessful exporters, particularly in the 1980s, strategic trade policy thatshowed how countries could manipulate the terms of trade became very popu-lar in the U.S. Yet as the Japanese economic boom fell apart for mostly unre-lated reasons, such economic analysis fell out of favor.

The recent work by Gomory and Baumol and Samuelson are seen to be ofgreat importance as containing contain novel insights for trade theory. Yet surelythe Chinese and other successful exporters might be forgiven for thinking thatrevisions in our trade models are highly correlated with the U.S. trade deficit!

Let me now briefly turn to the second theme of my presentation: domesticand international options that the U.S. might have in “dealing” with the newcompetitive threat from advanced developing countries.

With respect to domestic policies, one cannot avoid being struck by thelongstanding sterile political debate about trade. Most Republicans (and I saymost to rule out the so-called nationalist camp led by those such as PatBuchanan) have long argued for free trade—unless, of course, they are fromtextile states! Yet Republicans have unfortunately bought into the typical lib-eral economist view of free trade as being part of a general laissez faireapproach to the economy. Because economists tend to say little about incometransfers that might be necessary as a result of free trade and job losses, wehave seen a very naïve understanding of American domestic politics. Despitetheories about smooth economic adjustment, we have not seen steelworkersand autoworkers rushing to become nurses, despite the high salaries in thisprofession. Instead, together with firms in the textile industry and agricul-ture, they have preferred to invest in senators and congressmen who willdeliver protection—rather than investing in technological innovation, educa-tion, and job retraining.

For their part, Democrats have increasingly become the party of protection,although the leadership has often been considerably more free trade oriented.Indeed President Bill Clinton’s success in getting a few Democrats to go alongwith Republicans on NAFTA, the Uruguay Round and other negotiations havebeen viewed as great political successes.

In my view, considerable bipartisan attention needs to be devoted to prop-erly managing our international trade policy and linking it to a domestic strat-egy. This would involve a host of issues such as pension and health benefitsportability, aid for technological innovation, and innovation. Frankly, I hopefor the day that “proactive trade adjustment assistance” becomes a sexyWashington topic. But I fear I hope in vain.

Let me now turn to international negotiations and unilateral measures as anapproach to dealing with advanced developing countries.

In terms of unilateral actions, for the most part actual implementation ofprotectionist unilateral measures to create policy changes appears to create moreproblems than it solves. On the other hand, it may usefully be employed as astrategy to promote compliance with broader agreements such as the WTO,about which I will have more to say later.

Developed countries, in particular the U.S.’ Generalized System of Preferencesprogram but also others like the EU’s African, Caribbean, and Pacific policies, canbe powerful tools to affect advanced developing countries; the current debate inthe U.S. is primarily about whether countries like India and Brazil should stillreceive the same benefits as Bangladesh and Ecuador. On this note, the policy pri-ority should probably be to establish explicit rules for phasing out of preferencesfollowing specific schedules and evaluations of development levels. These could fol-low accepted international standards such as the World Bank is developing: meas-ures to legitimize preference-removal.

Actions proposed like the Graham-Schumer bill earlier this year that seek toimpose hefty tariffs across-the-board on Chinese goods are not viable policyoptions as they are likely to simply lead to a series of retaliatory measures. Whenpolicy instruments such as a sustained undervaluation of one’s currency are usedto capture market share, the impetus should be to bring the issue to the multi-lateral, rules-based system and the IMF before engaging in unilateral action.

Bilateral agreements, in particular in the form of Free Trade Agreements(FTA’s), are a superficially appealing means of extracting concessions fromcountries. Indeed, some have advocated these as a key part of what has beentermed “competitive liberalization.” But for the most part, this strategy has beena disaster. By turning trade accords into highly specific and tailored agreementssuiting various industries, the broad coalition for trade has been undermined.

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More practically, this approach has been used more successfully by Asian coun-tries than the U.S.—despite their initial reluctance to use them. And with therenewal of Trade Promotion Authority in doubt, this competitive liberalizationstrategy has backfired as other countries are likely to pursue such accords whilethe U.S. is unable to do so.

Sectoral accords such as those in textiles, steel, electronics, and autos, amongothers have had mixed success. They have given breathing room to U.S. indus-tries, but without real competitive adjustment, they are hardly an answer. Forexample, in autos, Japanese firms simply moved upmarket and created a newthreat to luxury makers, while also moving to the U.S. and bringing their sup-pliers with them.

Minilateral agreements such as NAFTA and even broader accords may seemto give the U.S. greater control than working through the WTO. Yet they canbe very damaging by creating a ‘false’ sense of comparative advantage, whereresources are allocated inefficiently from a global perspective but seeminglyoptimal for the regional community so long as it remains closed. Moreover,they can foster targeted domestic lobbying against broader forms of liberaliza-tion, in particular for those new ‘faux-competitive’ sectors—thus masking theneed for real adjustment.

The WTO and its dispute settlement mechanism (DSM) serves as a rules-based and legitimate means of negotiating with advanced developing countries.

The pros of this approach are that they carry legitimacy in the world system,and so are politically viable; retaliatory measures follow clear rules and do notrisk the possibility of trade wars that can be costly.

The cons of this approach are that its effectiveness can be limited. Often thereforms demanded by the developed world to prevent ‘unfair’ practices aremuch more easily achieved in negotiating for accession, as in the cases ofVietnam and Russia, rather than in further disputes that should theoretically behandled by the DSM, but often become long drawn out affairs.

The DSM should be utilized more often for combating industrial policieslike offsetting and forced technology transfer. Because innovation is the key toreaping future gains from trade, the WTO forum should be used to make surenational innovation does not depend on forced technology transfer. Althoughfirms may be willing to comply with national demands as a strategy for marketaccess, these actions undermine U.S. competitiveness over the long run.

To sum up: It is time for the United States to develop a coherent trade anddomestic policy to enhance both its position in the global economy and to pro-mote global growth. The notion that the market takes care of all problems andthat government policies have no positive competitive effects is clearly false. To

paraphrase John Maynard Keynes, it is time for “practical men, who believethemselves to be quite exempt from any intellectual influences to stop being theslaves of some defunct economic model.”

SUSAN BUTTS: I am going to take a practical approach to some of the issuesthat we are considering today, framed in part by the perspective of the DowChemical Company, a multinational corporation with about $45 billion inannual sales (for which I work). We are either the largest or the second largestchemical company in the world because we compete directly with BASF; sosometimes, depending on the exchange rate between the euro and the dollar, wemay switch positions.

We face the decisions every day about how we are going to be successful inselling our products around the world. In particular, I want to address how wemake decisions about where to locate our assets. We make decisions about twotypes of assets, both the physical assets, such as our manufacturing plants, andthe human assets, such as the people in our research and development labora-tories. In thinking about the intersection of the factors that drive these businessdecisions and policy, it occurred to me that that intersection is in fact rathermessy, because policy can sometimes have a direct and controlling impact onthese factors. More often, however, the impact is going to be indirect, andsometimes it is even irrelevant.

Therefore, the trick for looking at these issues is figuring out for which areasare the policy impacts most critical. In fact, in looking at the title of today’s pro-gram, National Strategies to Build Comparative Advantage, it occurred to methat what is really important to companies is not comparative advantage, butcompetitive advantage. In other words, a comparative advantage that does notoffer a competitive advantage is really an irrelevant one. In the simplest terms,the imperative for companies is to maximize their sustainable profitability overtime. This objective drives the long-term strategic decisions about where com-panies locate their assets.

I also want to talk about some of the factors that we take into considerationwhen we make decisions about where to locate our physical assets and humanresources. Corporate decision-making, by its very nature, is determined bymany things, and therefore, a particular decision on where to locate assets inorder to gain a competitive advantage is driven by many factors. But we arealways trying to maximize the competitive advantages, and minimize or elimi-nate the competitive disadvantages.

Some of our principal concerns include the cost, availability, and quality ofour raw materials, labor force, and the infrastructure that we have to work with-

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in. We also consider government incentives, such as tax credits, or penalties, suchas taxes. We also look at things which are much less quantitative and instead,more qualitative; but they are nonetheless important, and include things like theinnovation climate.

The innovation climate is a complex factor, because it might encompass severalissues, including the quality of the education system that is producing the workforce; a company’s ability to access the resources available at universities; and pro-tection for intellectual property. Another concern is the regulatory and legal climatein which a company has to operate. Last, but certainly not least, companies consid-er their access to markets, and that includes both net market growth, which mayoccur in some geographies, as well as potential increases in market share. In tryingto make our decisions about where to locate assets, we are going to take all of thesethings into account.

This is not a very quantitative exercise, and sometimes the net balance of advan-tage versus disadvantage is not clear. We often have to make estimates, projectionsand sometimes even guesses. On some occasions, however, we find that a few of theaforementioned factors become really dominant, and the decisions do become clear.

I would like to go through a couple of examples to help illustrate that. I also wantto mention a particular publication, “Here or There, a Survey of Factors inMultinational R&D Location,” that was actually a report to the GovernmentUniversity Industry Research Roundtable (GUIRR) of the National Academies.This report was based on a very interesting study by two economists from GeorgiaTech and Emory University, respectively, Marie and Jerry Thursby. The study wasactually provoked because of discussion within GUIRR about the appearance ofmore and more large U.S.-based companies building R&D facilities in the emerg-ing geographies like China and India. Participants in the discussion wondered if thetrend in private sector R&D resembled manufacturing in the sense that big com-panies are going to India and China because of the lower labor costs, or were theresome other factors that were driving these shifts in R&D?

Attempting to answer these questions, Marie and Jerrie Thursby surveyed 240companies in the United States and in Europe about the factors that influencedtheir decision to build an R&D facility that they recently completed, or one thatthey are planning to build. Importantly, they did not try to ask the broad, philo-sophical question about how you decide whether to build in the United States orChina; instead, they asked about a specific facility, because they wanted to avoidphilosophically expected answers.

Among the study’s most interesting findings was the realization that when com-panies based in developed economies like the United States and Europe decided tolocate in emerging economies like China and India, the most important driving

factor for them was access to quickly growing markets. The opportunity to havegrowth in sales and profitability by simply reaching a population that they hadnot been able to sell to before was by far the most important factor.

Other benefits that the study elucidated included the quality of the employ-ees that companies felt they could hire in most geographies, in part because ofthe increasing quality of the universities in places like China and India; andaccess to university resources, both in terms of equipment, and the ability tocollaborate with faculty members on doing more fundamental research.Companies also saw a benefit in cost.

But I would caution on the cost issue because most companies, includingmine, feel that the differential in labor cost between the developed economiesand the developing economies is something that is going to change over time,and that differential will therefore decrease. In other words, it would not be agood long-term strategic decision for us to build in China because we have ashort-term large differential in labor cost. We see the difference in labor cost asa nice collateral benefit that comes from being in China, but that is not why weare there. We are there because we want to be able to sell our products to thatvery large and rapidly growing economy.

Generally speaking, however, even a grand strategy must allow for discrep-ancies or outlying situations, which then require individual decisions. Forexample, the Dow Chemical Company generally tries to build large, world-scale, fully integrated manufacturing facilities. We feel that it is to our compet-itive advantage to have everything together in a large integrated site, or in otherwords, if we can go from the very beginning of the supply chain through to ourproducts. However, that strategy does not always make sense in terms of infra-structure and cost, and then we have to deviate from our overall strategy.

For example, while you are probably unaware of most of Dow’s products,you have perhaps heard of Styrofoam®, the blue board used in housing insula-tion. Interestingly enough, because Styrofoam has such a low density, an inter-continental shipment cannot be justified relative to the sale cost of the product.Although it is not very heavy, it takes up a lot of space and it is too expensiveto actually ship those products from a world-scale plant that might be built, say,in the United States. So for physical assets in such a business, we actually havebeen building plants around the world for a long time so that we can supplylocal markets from local plants.

In conclusion, I would point out that it is very important to think abouthow policy impacts the factors I mentioned. Some of them, especially thoserelating to innovation, competitiveness, and the link between research and cor-porate profitability, are of extreme interest to my company and me.

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ROBERT ATKINSON I want to give a slightly more cautious or skepticalview of some of the competitiveness debate. Why do we care about this? Weseem to care about it almost because it is motherhood and apple pie. We careabout competitiveness for a fairly straightforward reason. We want, and anycountry wants, to be producing on the higher value-added end of production,not the lower value-added end. When our economy essentially was not widelytraded internationally, that debate over value-added did not matter very much.Whether we imported or exported high value-added good and services mat-tered little to our overall prosperity. Now that a much larger share of the U.S.economy is traded globally, the debate matters quite a bit more.

But I also think we can overstate the importance of competitiveness. In real-ity, most of our standard of living and our prosperity is due to domestic pro-ductivity factors, not trade factors. The Information Technology and InnovationFoundation is releasing a report: Digital Prosperity: Understanding theEconomic Benefits of the Information Technology Revolution, that examinesthe role of information technology (IT) in productivity growth and economicgrowth. To summarize IT’s impact quickly is to say that it is phenomenal.Virtually 100 percent of the labor productivity pick up, from the post-1996turnaround to today is due to the use and production of information technolo-gy. That is not to say that trade is not important. It certainly is, but we have tokeep it in perspective as we have these debates.

I recently published a book called The Past and Future of America’s Economy,and one of the points I made was that the economic transition that we are goingthrough today, driven largely by the IT revolution, is quite similar to one wewent through earlier in our history. In the post-war period, the U.S. economyestablished a national market for the first time. People often do not rememberbut before World War II, the economy was largely a set of regional markets.After the war, not only did markets for most goods and services become nation-al, but production, at least for most manufacturing sectors was able to locateanywhere in the United States.

As a result, we saw dramatic shifts in the location of production, particular-ly out of high-cost regions to low-cost regions, quite similar to what we are see-ing today. Then production moved to Southeastern United States. Today itmoves to Southeastern Asia. For those regions who were on the losing end ofthat production shift, there were two paths to take. One was renewal throughinnovation, and that is largely a New England story. Their relative per capitaincome rose largely because they moved into the higher valued-added sectors.Other parts of the country, including the Great Lakes region and states likePennsylvania never fully adjusted, and their relative per-capita income fell.

Their absolute incomes have gone up as the overall GDP and per capita incomehave gone up. But in comparison to the rest of the country, their economieshave deteriorated. In some ways, a central question we face as a country todayis which of those paths we will take as a nation.

What should we do in response to rising economic competition from abroad?I am less optimistic than others about this debate because there is still a largeswath of the intelligentsia in Washington who are in denial about whether thereis a real problem. One group says: we do not need to do anything, there is no realproblem. Another group admits there is a problem, but its proposed solutions arelimited. They propose supply-side solutions, not in the sense of Reaganomics, butwith the perception that this is a problem that will be solved with more researchand better-educated workers. They argue that if we build these supply compo-nents that globally competitive companies can rely upon, they will stay and/orlocate here, and everything will be fine. I am very skeptical that this is enough.While it is a nice notion, it is not sufficient. We need to think about not justboosting supply, but also boosting the demand by multinational companies fordoing high value-added innovation-based work in the United States.

Why is there so much focus on the supply side? According to the dominantneoclassical economics view (and this is not only expressed in economic jour-nals, but also in the work by Washington economic policy makers) firms com-pete, but countries do not. If you buy that notion, then it means that we do nothave to do anything other than ensure that resources freed up when firms loseare readjusted and moved through the economy. If a firm happens to lose inglobal competition, it is too bad for the firm and we should try to help theworkers find new jobs, but beyond that there is nothing that should be done.

Why is that wrong? It is wrong largely because it ignores the fact that oncelost, these disparate factors of production cannot be quickly reassembled andput back into an organization that produces more high value-added product.More likely, what will happen is they will reassemble and the workers will beworking at McDonald’s. Using an analogy, if the Europeans were able to con-tinue to unfairly subsidize Airbus and and distort the market into gaining acompetitive advantage and put Boeing out of business, the United States wouldnever ever again recreate a Boeing, no matter how low the dollar might fall. Itwould be impossible because Boeing is more than just an organization; it rep-resents a large stock of embedded knowledge, not just in the organization butin its suppliers, universities, etc.

What do we need to do? I do not want to have my comments interpreted assaying that the competiveness bills in Congress—and the Alexander bill,Protecting America’s Competative Edge report, PACE bills, and Lieberman-

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Ensign bills—are not important. They certainly are. We need to do more. Weare one of the few countries that has seen research spending as a share of GDPdecline. We have key science, technology, engineering and mathematics skillgaps as well. The current legislation would help address these challenges

I would argue that that is certainly not enough. I would add a couple of otherthings. The recent Spellings Commission report on higher education, led byMargaret Spellings, Secretary of the U.S. Department of Education, highlights thefairly significant failures of our higher education system to do what it is supposedto be doing, which is teaching. We all pat ourselves on the back and say yes, K-12is a problem, but at least we have the greatest higher education system in the world.While we have some of the finest research universities in the world, I would arguethat overall higher education is not doing enough to teach college students the keyskills they need to be successful in the new global economy.

What else do we need to do? We need to create incentives for companies tolocate high value-added positions in the United States. Let me just suggest twopossible ideas. One relates to the R&D tax credit. In 1990 the United States pro-vided the most generous R&D tax credit in the world. Now we are 17th amongOECD nations, largely because other nations have expanded tax incentives forR&D, while we have cut ours. We should create a new “knowledge tax credit,”which would double the R&D tax credit, add a component to it for fixed expens-es, not just incremental spending, and include a credit workforce developmentexpenditures. Some would argue that it’s better to just cut corporate tax rates as away to boost competitiveness. I would argue that a knowledge tax credit is a bet-ter strategy because you get two bangs for the buck: reduced corporate costs socompanies can become more competitive, and incentives for them to build impor-tant building blocks of competitiveness, of which two are skills and research.

Finally, I find it to be disingenuous or just intellectually inconsistent whenfree traders laud the the wonders of free trade and the importance of markets(both of which I agree with), and yet defend foreign trade protectionism. Aclassic example is Chinese currency manipulation. According to markets andtrade theory, currency should be adjusted by supply and demand, and yet weseem, in this country, to be willing to accept those sorts of factors. As a forth-coming ITIF report, “The Rise of the New Mercantilists,” documents, system-atic protectionist policies and practices that nations in Europe, Asia, and SouthAmerica seek to gain competitive advantage in exactly what it is that we aregood at, which is IT. Now that we are running a trade deficit with India as well,is it acceptable for them to have 28 percent tariffs and still call this a part of freetrade? Is forced technology transfer acceptable as well? But we seem as a coun-try, content to sit there, accept that, and say that because these countries are

poor, they get to do that. But we are running an $800 billion trade deficit andsomehow that is alright?

Winning the competitiveness challenge will require sustained and committedaction on a number of fronts: domestic R&D investment, more effective STEMeducation, stronger incentives for corporate R&D, and more aggressive action tolimit unfair foreign trade practices.

RALPH GOMORY: I am going to focus on two concerns. One is, I’m goingto balance trade in the United States, and second, I’m going to motivate the cre-ation of high-value jobs in the United States. How am I going to do this? Verysimple. I will listen to Warren Buffett. Warren Buffett has proposed that U.S.exporters should receive certificates for the value of what they export. Theyexport $5 million worth of goods; they get $5 million worth of certificates.They then put these out to sell on an open market. The importers of goodsneed the certificates. They buy it on the open market. They can only import $5million if they buy $5 million.

This might be a little abrupt for some people who are currently importing inenormous quantities, and which are not balanced by anyone’s exports from theUnited States, so I am willing to bend a little bit and soften the impact by issu-ing, in the first few years, more certificates than the export value. But we willtighten it up as we go along. In the version that was introduced in the Senate bySenators Dorgan and Feingold, they do exactly that. There are many ways.

In spite of the lighthearted way in which I am presenting this idea, this pro-posal is quite feasible if it is properly managed. We have had long conversationswith very good trade lawyers on whether this proposal is compatible with theWTO. They think it is. It would have to be temporary, but that does not mat-ter. If we are deadly serious that we need to balance trade, and we ought to besince it exacerbates all the problems that we are dealing with, such as a lack ofcompetitiveness and competing with a severely undervalued currency. Weshould stop standing around and start doing something.

Earlier today, Pete Peterson talked in some sense about the lack of discipline,or the lack of sacrifice. This is one simple, straightforward way to impose disci-pline. In typical Warren Buffett fashion, this solution goes right to the heart ofthe matter.

The creation of more high valued jobs is a more complicated matter.Empirically, what do other countries do to motivate the creation of high-valuejobs? In Singapore, foreign companies receive special tax treatment for pro-ducing disk drives there. Singapore’s government will even build facilities forthe foreign producers. They also supplement the wages of the workers. In

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other words, Singapore makes it attractive for companies to establish a pres-ence there.

Now what does that mean, to make it attractive, and why do they do it? Thisis the fundamental issue. Countries want and need high value-added jobs. Thatis what drives GDP. On the other hand, companies want profit. That’s whatthey are in business to create. Singapore strikes a deal by offering companiesprofitability if they bring the high value jobs that they want for their country.

There are two different kinds of entities here. Countries that want highvalue-added jobs and companies that want profits; they strike a very sensibledeal that is beneficial to both. So Singapore gives companies incentives to gothere to make profits. It makes sense for Singapore to do that. Let’s keep inmind, however, that these two creatures have different values. There are privatesector goals, which are profitability. There are also country goals, which is thecreation of high value-added jobs.

How do we apply these ideas in the United States? We have no tradition ofa bureaucracy that will make special deals with individual companies to getthem to stay here and make semi-conductors, other products, or generate high-value services for us. But we do have something that many other countries donot, and that’s the corporate tax. On a very simplified level, we have a way toalign the corporate tax rate with the average value per U.S. employee; a veryproductive per-worker company in the United States pays virtually no corpo-rate tax. However, if it is below the level, it pays an extraordinarily high corpo-rate tax. That motivates companies in every possible way to be productive forour country. The only way it will ever make money is if it is high on that list.It can make profit, but it will be taxed away. This could be made revenue neu-tral, because taxes will go up among the unproductive companies, and downamong the other ones.

Many variations of this are possible, but we should seriously consider themany ways of using the corporate tax rate. The corporate tax rate gives us enor-mous leverage over companies. We should use it to motivate companies to dowhat we want them to do. Companies should face low tax rates when they gen-erate high value-added jobs, and high taxes when they produce low value-addedpositions. This is not really a new idea, because as you have just heard Rob say,this is already being done with the R&D tax credit. The R&D tax credit is away to lower your corporate tax, which also means tax rate, for doing what soci-ety thinks you ought to do, more R&D.

The R&D tax credit is a step in the right direction. But why should we tellthem what to do? For some firms, more R&D is right, and for some people, itis not. In general, it is a good idea. But why not aim directly at the goal? High

valuated jobs? If a company can lower its tax rate by innovating at every level,not just the R&D level, but with ingenuity in how they sell, with ingenuity onthe manufacturing line if they manufacture goods, with ingenuity in the waythey respond to incoming calls? If they can get the work they used to do com-pleted more quickly and more efficiently, they are adding to the GDP. Weshould reward them for that.

We should not limit tax incentives to scientific and technical areas. Weshould rather let companies invent their own way to achieve the goal we allwant, which is, high value-added jobs. This will incent them to do just that.

BRUCE STOKES: Ralph, how would you deal with the economic andpolitical transition costs associated with your recommendations? For exam-ple, if you were to in effect raise the corporate tax on low value-added com-panies, it would encourage or incentivize them to move abroad faster thanthey already are. One could envision apparel companies and other businessesthat would decide that there is not much value that they could add in theUnited States and that they have to move. That would create a political back-lash. So how would you deal with that?

RALPH GOMORY: Well, there is no way you can increase productivity ifyou just leave all the low producing ones alone. You have got to give them anincentive to improve. There is no avoiding the problem. The problem you pointto is unavoidable. The question is, how do we tackle it? First of all, you tackle itgradually so that you give people a chance to adjust. But secondly, I am quiteoptimistic. I have very rarely seen anything that is being done with lots of lowwage workers that you can’t do differently with automation and robotics. Forinstance, we dig ditches with backhoes. If you looked at a gang of 20 or 30 peo-ple digging with shovels, you might not think of the backhoe. But someone hadto. The pressure to find a more productive way will bring about that directionalchange. If you can do something with a lot of cheap labor, or if you have to stepback and take a chance, invest capital, invent something, you are going to choosethe first way. We will remove that option from the board.

BRUCE STOKES: What I like about the idea is that it incentivizes peopleto not only invest in science and technology, but also to adapt to advancedmanagement techniques. Vinnie, I want to press you on your argument that thebest trade strategy at this juncture would be to more aggressively use the dis-pute settlement mechanism (DSM) in the WTO. The problem with thatapproach is that the dispute settlement mechanism has become captive to cor-

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porate interests in the United States. Cases are pursued or not pursued depend-ing on the self-interest of individual corporations, and not necessarily in thenational interest. Politicians admit that they are not about to pursue a case unlessthe industry involved is willing to support them politically, because of the polit-ical problems in pursuing a case. Now, it is simple enough to say politiciansshould be high-minded and bureaucrats should be high-minded, but we knowfrom experience that they are not about to become more far-sighted in their poli-cies. How do you get around that problem?

VINOD AGGARWAL: I think that is a good point, but it is hardly a newproblem that trade policy benefits particular companies. If we look at all of thevoluntary export restraints, steel, textiles, electronics, the semi-conductor indus-try association pressing for the opening of the Japanese market, it has always beenparticular corporate interests. What we see recently is this new developmentwhere a large-scale effort is being made in the DSM to actually take China to theDSM on intellectual property issues using the Trade-Related Aspects of IntellectualProperty Rights agreement of the Uruguay Round. This may benefit certain com-panies more than others, but I think that is a very general approach to dealing withthe problem, and much better than just simply opening up markets in one or twosectors. Going after the lack of protection of intellectual property in China is a verygood issue to pursue.

BRUCE STOKES: It is an excellent example, except that we have not filed thecase because the companies are getting cold feet.

VINOD AGGARWAL: There are two ways to look at that. One way is thatthe companies are also trying to broaden the argument before they file the case.

BRUCE STOKES: Susan, what do Congress and the president need to do toencourage Dow and similar companies to redouble their U.S. investments? As acorollary to that, what kind of immigration policies do we need to meet yourcompany’s needs here in the United States?

SUSAN BUTTS: Doubling our investments is probably not realistic.However, maintaining our investment in the United States is something that isvery much in the company’s best interest. About a third of our sales are in theUnited States, about a third are in Europe, and about a third are in the rest ofthe world. Having been headquartered in the United States, we already have asignificant investment here.

But in terms of what the president and the Congress could do, there are acouple of things that are important to us. One would be addressing the seriousproblems that we see in energy and feed stocks. This is a serious problem for mycompany because we suffer twice when the cost of oil and gas goes up because itnot only affects the cost of energy that we use in manufacturing, but oil and gasare also our feed stocks for chemical products. So probably at the top on our listwould be addressing the issue of the availability, supply, and cost for energy.

Another issue that we are concerned about would be the extension of theR&D tax credit because in order for the United States to continue to be anattractive place for us to do R&D, the tax credit is an important component.Also, many of the things that were addressed in the American CompetitivenessInitiative are very important to us, including more funding for research in thephysical sciences, which are not only important to a chemical company, but theyare really foundational for biomedical sciences and other things that are impor-tant to the country.

With regard to immigration, the most significant issue from our perspective hasto do with the highly educated workforce that we employ for R&D. In the past,the United States was very successful at not only attracting the best and the bright-est students from around the world, but also allowing them to stay and pursuecareers here. With 9-11, it became much more difficult for the best and the bright-est from other countries to enter graduate school in the United States, and manyof them have now chosen to stay at home, and not only to be educated at home,but to seek their careers at home. So making it more attractive or easier for the bestand the brightest foreign students to pursue their graduate education in the UnitedStates, and then remain here and work in fields like research and development aftergraduation would be important for Dow and other companies.

BRUCE STOKES: Rob, these are all very fine and wonderful proposals youhave all made. But we have a political process in this town that seems to be bro-ken in terms of addressing them. Susan’s point about immigration is eminent-ly arguable and I would certainly support it myself. But in the current anti-immigrant fervor in this country, even increasing the H1-B visa program hasproved difficult at times and there is significant opposition to a substantialexpansion of that program, let alone other categories of immigration. Rob,what do you think are the key political obstacles in Washington to trying to getsome of these fairly sensible ideas into law?

ROBERT ATKINSON: My answer is going to reflect the fact that I workat a think tank. I believe that the first step in dealing with these challenges is

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winning the intellectual fight. If the intellectual fight were won, this wholedebate would be significantly easier. As I said earlier, I do not even think wehave agreement that there is a problem. There is a whole swath of neoclassicalideologues and a lot of think tanks in Washington who argue that the tradedeficit is not a problem or that the trade deficit is our fault and that if we wouldjust save more, it would end, and why are we worrying about all this other stuff?Those people are quite influential in economic policymaking. So it is probablyas unrealistic to expect them to change their opinions as it is to expectRepublicans and Democrats to work well together. However, I am not as pes-simistic on the political side in the following sense. I think we will raise thenumber of H1-B visas and that we will do something on the R&D tax credit.Congress is a slow moving animal, but eventually it gets up to speed and it startsmaking these policies. They are not as fast as most of us would like, but I thinkthat in the next two or three years, we will see movement from where we aretoday. However, we may not see as much change as we might like.

BRUCE STOKES: There is a second question about the political atmos-phere in Washington. One audience member pointed out that increasingly inthis town we have a self-interested group of corporations that do business inChina. Unlike the 1980s, when we had trade tensions with Japan, and I knowfrom my own personal experience, if I wrote a piece that was critical of Japan,no one from the corporate community called me up to complain. Somemight call up to support the idea. But today if you write a piece critical ofChina, the first reaction comes from American corporations who do businessin China saying that you really don’t understand the problem and we reallycan’t do anything about this China issue. This change is reflected back in thepolitical process in Washington, where now American corporations are argu-ing a different side of this debate than they did in the 1980s. Perhaps this isa natural outgrowth of our investment, from companies that are dependenton imports from China as well as trying to export to China. But it does seemto complicate the political process.

ROBERT ATKINSON: That’s absolutely right, but it’s not as dire as youthink it is. I think that the Democrats taking over the Congress want to do some-thing, and enlightened business leaders know that. The concern then, if you are anenlightened business leader, is to give them something to do. As a result, there is anice overlap of issues that are in both parties’ interests. One of them is unfair tradepractices, for example: Microsoft getting sued in many different countries; stan-dard-setting being established to keep U.S. technology products out of countries;

and forced offsets, to name just a few. If you want to sell in China, you have toopen up an R&D lab, and I know that takes place. Another concern is rampanttheft of intellectual property. The Chinese government is stealing software. On allof those cases, there’s a fairly close synergy. The problem has been a lack of tradeenforcement in the last few years. It seems to be ramping up a little bit now, so overthe next couple of years you could see a lot more being done there that all sides inbusiness and government could support.

RALPH GOMORY: I was really agreeing with the fact that this is a prob-lem. It’s part of the evolution of the companies and there was a reference madeto Sam Palmisano’s article that essentially said IBM is not a U.S. multinationalbut a global corporation. Such an evolution complicates the relationshipbetween companies and countries in such a way that companies will be dealingwith each country from the viewpoint of the company and not of the country.The countries have to wake up to the fact that when they’re talking to organi-zations like IBM, which they think of as American companies, and they give ussome good advice about how we should conduct policies, that they are not talk-ing with an organization that has the same goals as the country does.

BRUCE STOKES: Ralph, one of the participants here asked if your book,Global Trade and Conflicting National Interests, is an attack on free trade agree-ments in the WTO. How do you think international trade should be conduct-ed going forward? In other words, should it be through WTO agreements orshould it be through other arrangements?

RALPH GOMORY: I’m not an expert on how to reach trade agreements.But I will comment on the book on which I am a recognized expert. The bookis entirely in favor of free trade. My personal observation and book assumes wehave free trade and we support it. But we point out that in a free trade envi-ronment, if your trading partner industrializes rapidly, that can have a real neg-ative effect on your country.

This has nothing to do with free trade at all. One of the things that I findmost discouraging when I come to Washington and talk with people is when Isay, “Look, the industrialization of Asia may have a negative effect, even in afree trade environment.” For some reason, people can’t hear or comprehendthat. They immediately start talking to me about the Doha Round. There isalso confusion over the impact of a changed world in which there are manyplants and call centers that were not there before. That is an impact. The con-ditions of trade are an impact. But people will only talk about the conditions

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of trade. They won’t look at the reality that is new, changing, and different. Butthat is what we need to look at.

BRUCE STOKES: Susan, one of the issues that you didn’t mention amongthe factors that determine why a company like Dow might conduct some busi-ness or even research and development abroad, was the existence or lack ofintellectual property protection. One of the things that has always struck me isthat you will hear companies come to Washington complaining about a lack ofintellectual property protection and press the United States TradeRepresentative to do something about that. But the financial or political incen-tives to not cite those R&D violations abroad overwhelms their concern aboutthe threat to their intellectual property. Obviously, that’s a calculation a corpo-ration makes and it may well be that the gains outweigh the potential losses.But it does seem to me that the corporations are actually making the right deci-sion. I am not suggesting that the country should second-guess the corpora-tions. But could you talk a little bit about the internal calculus of that and howone thinks about that inside the company.

SUSAN BUTTS: The issue of intellectual property protection is an impor-tant one, and it fits in that innovation environment that I mentioned as one ofthe factors. As you already said, Bruce, at least in the case of a country likeChina, the tremendous economic advantages of having access to a rapidly grow-ing market and growing the size of sales, is such a strong incentive that compa-nies such as mine would definitely like to see intellectual property protectionimproved in China. We feel that this issue is very important, and we would sup-port appropriate actions to make that happen.

At the same time, however, we’re pragmatic and so we find workarounds. Welook at how can we do R&D in China without losing important intellectualproperty. For instance, maybe we don’t produce the whole thing in China. Theremay be pieces that are done in the United States where we feel we have the abil-ity to protect the intellectual property, with other pieces done in China. It’s thewhole picture, or the aggregate, that gives us the competitive advantage.Therefore, we probably wouldn’t do everything in China. I think my company,certainly, and I believe many other large ones, are finding these sort of temporaryworkarounds that allow us to deal with the poor intellectual property protectionsthat currently exist, and hope that that the situation will be rectified in the future.

VINOD AGGARWAL: In terms of negotiations, it’s quite clear that theChinese are not protecting intellectual property, nor are other countries as well.

But it’s also true that there is no neoclassical trade when it comes to agricultur-al trade. Many of these countries would like to see the U.S. agricultural marketopen up. We actually have a mercantilist policy in agriculture, whatever else youmight want to call it. We have subsidies. Europeans have butter factories. Manyof these issues are dealt with in negotiations.

In the Doha Round negotiations, the discussion centered on the need forprotection of intellectual property in these countries. But for our part, we needto start getting rid of some agricultural subsidies. This was what I was referringto when I said that we have undermined the coalition for free trade by pursu-ing these bilateral trade agreements. We do not have a broad-scaled coalitionthat says we’ll open up our markets if you do that. Traditionally, for the last 50years, we’ve been very successful at building this kind of coalition. Therefore,the other issue involved in our lack of progress in WTO trade negotiations isthis trade off that we are unwilling to make.

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VINOD AGGARWAL is Professor in the Department of Political Science,Affiliated Professor of Business and Public Policy in the Haas School of Business,and Director of the Berkeley Asia Pacific Economic Cooperation Study Center(BASC) at the University of California at Berkeley. From 1991–1994, he wasChairman of the Political Economy of Industrial Societies Program. He is also thefounder and Editor-in-Chief of the journal Business and Politics.

Professor Aggarwal’s current research examines comparative regionalism inEurope, North America, and Asia with a focus on implications for the interna-tional system and multinational corporations. His publications include LiberalProtectionism, International Debt Threat, Debt Games, Le RenseignementStratégique d’Entreprise, and Une Nouvelle Approche des Phénomènes Sociaux. Hisedited volumes include among many others, Institutional Designs for a ComplexWorld and Asia-Pacific Crossroads. His latest book is entitled Northeast Asia’sNew Institutional Architecture. He has also published over 70 articles and bookchapters on the politics of trade and finance.

Professor Aggarwal consults regularly with multinational corporations onstrategic planning, trade policy, and international negotiations. In the publicsector, he has been a consultant to the Mexican Government, the U.S.Department of Commerce, World Trade Organization, OECD, the Group ofThirty, IFAD, and the World Bank. In 1990, he was Special Adviser on TradeNegotiations to the United Nations Conference on Trade and Development(UNCTAD) in connection with the GATT Uruguay Round negotiations andhas also worked with the APEC Eminent Persons Group. In 1997, he won theCheit Outstanding Teaching Award at the Haas School of Business for Ph.D.teaching; in 2003 he was first runner up for the Cheit Award for MBA teach-ing and won first place for the MBA program in 2005. He has been a ResearchFellow and Guest Scholar at the Brookings Institution, a Rockefeller Fellow,

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Council on Foreign Relations Fellow, a Professor at the Graduate Institute ofInternational Studies in Geneva, a Visiting Fellow at the East-West Center, anda Fellow at the Woodrow Wilson International Center for Scholars inWashington, D.C. He is also a lifetime member of the Council on ForeignRelations. Prof. Aggarwal received his B.A. in political science and psychologyfrom the University of Michigan and his M.A. and Ph.D. in international polit-ical economy from Stanford University.

ROBERT ATKINSON is President of the Information Technology andInnovation Foundation. He was previously the vice president of the ProgressivePolicy Institute (PPI) and director of PPI’s Technology and New EconomyProject. He is the author of the New Economy Index series which looks at theimpact of the New Economy on the U.S., state and metropolitan economies.He is also author of The Past and Future of America’s Economy: Long Waves ofInnovation that Power Cycles of Growth. While at PPI he has written ground-breaking reports on a wide range of economic and technology issues, includingoffshoring; growth economics; R&D policy; telecommunications policy; ande-government and e-commerce. He also directed PPI’s New Economy TaskForce, co-chaired by Senate Democratic Leader Tom Daschle and GatewayCEO Ted Waitt.

Previously Dr. Atkinson served as executive director of the Rhode IslandEconomic Policy Council, a public private partnership including as membersthe Governor, legislative leaders, and corporate and labor leaders. Prior to thathe was project director at the former Congressional Office of TechnologyAssessment. While at OTA, he directed The Technological Reshaping ofMetropolitan America, a seminal report examining the impact of the informa-tion technology revolution on America’s urban areas.

He received his Ph.D. in City and Regional Planning from the University ofNorth Carolina at Chapel Hill in 1989.

SUSAN BUTTS is the Senior Director of External Science and TechnologyPrograms at The Dow Chemical Company. In this capacity she is responsible forDow’s sponsored research programs at over 150 universities, institutes, and nation-al laboratories worldwide and also for Dow’s contract research activities with U.S.and European government agencies. She also holds the position of Global StaffingLeader for R&D, with responsibility for recruiting and hiring programs.

Dr. Butts is active in a number of organizations that address issues pertain-ing to relationships between industry, universities, and government researchlaboratories. She is currently a Dow representative to the Council for Chemical

Research, the American Chemical Society’s Committee on CorporationAssociates, and the Industrial Research Institute (IRI). She is also a member ofthe National Council of University Research Administrators (NCURA), theAssociation of University Technology Managers, the Society of ResearchAdministrators, the American Association for the Advancement of Science, andSigma Xi. Dr. Butts currently serves on the governing boards for the Council forChemical Research and the Alliance for Science and Technology Research inAmerica (ASTRA). She is also a co-founder and member of the Steering Teamfor the University-Industry Partnership Project, an effort sponsored by theGovernment-University-Industry Research Roundtable of the NationalAcademies, NCURA and IRI with the goal of lowering the barriers to industrysponsored research at universities.

Dr. Butts holds a B.S. in Chemistry degree from the University of Michigan anda Ph.D. degree in organometallic chemistry from Northwestern University. Beforejoining the External Technology group Dr. Butts held several other positions at Dowincluding Senior Resource Leader for Atomic Spectroscopy and Inorganic Analysiswithin the Analytical Sciences Laboratory, Manager of PhD. Hiring and Placement,Safety and Regulatory Affairs Manager for Central Research, and PrincipalInvestigator on various catalysis research projects in Central Research.

JOHN CRANFORD has worked for more than three decades as a reporterand editor, much of that time covering economics and government fiscal andmonetary policy. He came to Congressional Quarterly in 1984 and served as eco-nomics editor for three years before becoming senior economics writer. Duringthe late 1980s and early 1990s, he wrote extensively on trade, foreign invest-ment, banking and securities issues. He covered the stock market crash of 1987and its aftermath and the savings and loan and banking crises of the period. Heis the author of Budgeting for America, a 1989 book on U.S. federal budget poli-cies, published by Congressional Quarterly.

For six years (1996–2002), Cranford was senior economics editor atBloomberg News, where he managed coverage of the U.S. economy, FederalReserve policy and banking issues, supervised coverage of the economies andcentral banks of all North and South American countries, and helped organizeeconomics coverage in Europe and Asia.

He returned to Congressional Quarterly in 2003 and soon after was namedmanaging editor of the CQ Weekly. When the magazine was revamped in January2005 to focus more closely on the ways public policy and commerce interact, hewas named to the new position of national editor, where he oversees economicand regulatory coverage and writes a weekly column called Political Economy.

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CARL DAHLMAN is the Henry R. Luce Professor of International Relationsand Information Technology at Georgetown University’s Edmund A. WalshSchool of Foreign Service. Professor Dahlman comes to Georgetown after morethan 25 years of distinguished service at the World Bank. His research and teach-ing explores how rapid advances in science, technology and information areaffecting the growth prospects of nations and influencing trade, investment, inno-vation, education and economic relations in an increasingly globalizing world.

Previously, Professor Dahlman served as Senior Advisor to the World BankInstitute. In this role he managed the Knowledge for Development (K4D) pro-gram – an initiative providing training on the strategic use of knowledge for eco-nomic and social development to business leaders and policy makers in develop-ing countries. Prior to developing the K4D program, he served as Staff Directorof the 1998–1999 World Development Report, Knowledge for Development. Inaddition, he was the Bank’s Resident Representative and Financial Sector Leaderin Mexico from 1994 to 1997, years during which the country coped with one ofthe biggest financial crises in its history. He has also led divisions in the Bank’sPrivate Sector Development, and Industry and Energy Departments. He has alsoconducted extensive analytical work in major developing countries includingArgentina, Brazil, Chile, Mexico, Russia, Turkey, India, Pakistan, China, Korea,Malaysia, Philippines, Thailand, and Vietnam.

Professor Dahlman’s publications include China and the Knowledge Economy:Seizing the 21st Century, Korea and the Knowledge-Based Economy: Making theTransition, and India and the Knowledge Economy: Leveraging Strengths andOpportunities. He is currently finishing a knowledge economy study on Mexico,working on a book on the challenge of the knowledge economy for educationand training in China, and collaborating with research teams in Finland, Japanand Korea to produce books on each country’s development strategies. Heearned a B.A. magna cum laude in International Relations from PrincetonUniversity and a Ph.D. in Economics from Yale University.

RALPH GOMORY has been President of the Alfred P. Sloan Foundation sinceJune 1989. Dr. Gomory was Higgins Lecturer and Assistant Professor at PrincetonUniversity, 1957–59. He joined the Research Division of IBM in 1959, wasnamed IBM Fellow in 1964, and became Director of the Mathematical SciencesDepartment in 1965. He was made IBM Director of Research in 1970 with lineresponsibility for IBM’s Research Division. He held that position until 1986,becoming IBM Vice President in 1973 and Senior Vice President in 1985. In 1986he became IBM Senior Vice President for Science and Technology. In 1989 heretired from IBM and became President of the Alfred P. Sloan Foundation.

Dr. Gomory has served in many capacities in academic, industrial and gov-ernmental organizations, and is a member of the National Academy of Science,the National Academy of Engineering, and the American Philosophical Society.He was elected to the Councils of the three societies. He was a Trustee ofHampshire College from 1977–1986 and of Princeton University from1985–1989. He served on the President’s Council of Advisors on Science andTechnology (PCAST) from 1984 to 1992, and is presently a member of PCASTand of COSEPUP, the National Academies’ Committee on Science, Engineeringand Public Policy.

He has been awarded seven honorary degrees and many prizes including theLanchester Prize in 1963, the John von Neumann Theory Prize in 1984, theIEEE Engineering Leadership Recognition Award in 1988, the National Medalof Science awarded by the President in 1988, the Arthur M. Bueche Award of theNational Academy of Engineering in 1993, the Heinz Award for Technology, theEconomy and Employment in 1998, the Madison Medal Award of PrincetonUniversity in 1999, and the Sheffield Fellowship Award of the Yale UniversityFaculty of Engineering in 2000.

Dr. Gomory has been director of a number of companies including TheWashington Post Company and the Bank of New York. He is currently a direc-tor of Lexmark International, Inc., and of two small start-up companies. He wasnamed one of America’s ten best directors by Director’s Alert magazine in 2000.

Dr. Gomory’s research interests include integer and linear programming, non-linear differential equations, and computers. In recent years, while continuing hismathematical research, he has written on the nature of technology and productdevelopment, industrial competitiveness, technological change, and on econom-ic models involving economies of scale. He is the author of a recent MIT Pressbook (with Professor William J. Baumol) on conflicts in international trade.

Dr. Gomory received his B.A. from Williams College in 1950, studied atCambridge University and received his Ph.D. in mathematics from PrincetonUniversity in 1954. He served in the U.S. Navy from 1954 to 1957.

LEE HAMILTON is president and director of the Woodrow Wilson InternationalCenter for Scholars, and director of The Center on Congress at IndianaUniversity. Hamilton represented Indiana’s 9th congressional district for 34years beginning January 1965. He served as chairman and ranking member of theHouse Committee on Foreign Affairs, chaired the Subcommittee on Europe andthe Middle East, the Permanent Select Committee on Intelligence, the SelectCommittee to Investigate Covert Arms Transactions with Iran, the Joint EconomicCommittee, and the Joint Committee on the Organization of Congress. As a

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member of the House Standards of Official Conduct Committee Hamilton was aprimary draftsman of several House ethics reforms.

Hamilton has been appointed to the Congressional Commission on theStrategic Posture of the United States. He was appointed to the National WarPowers Commission, a private, bipartisan panel led by former Secretaries ofState James A. Baker III and Warren Christopher, to examine how theConstitution allocates the powers of beginning, conducting, and ending war.Hamilton served as co-chair of the Iraq Study Group, a forward looking, bi-par-tisan assessment of the situation in Iraq, created at the urging of Congress.Hamilton served as Vice-Chair of the 9/11 Commission and co-chaired the9/11 Public Discourse Project, established to monitor implementation of theCommission’s recommendations. He is currently a member of the President’sForeign Intelligence Advisory Board, the President’s Homeland SecurityAdvisory Council, the FBI Director’s Advisory Board, the Defense Secretary’sNational Security Study Group, the US Department of Homeland SecurityTask Force on Preventing the Entry of Weapons of Mass Effect on AmericanSoil, co-chair of the Aspen Homeland Security Group, and co-chair of theNational Advisory Committee to the Campaign for the Civic Mission ofSchools with Justice Sandra Day O’Connor.

Hamilton is a graduate of DePauw University and Indiana University Schoolof Law. Before his election to Congress, Hamilton practiced law in Chicago,Illinois, and Columbus, Indiana. He is the author of A Creative Tension - TheForeign Policy Roles of the President and Congress; How Congress Works and Why YouShould Care; and co-author of Without Precedent: The Inside Story of the 9/11Commission and The Iraq Study Group Report.

KATHERINE HAUSER is the Executive Director of the Trans-AtlanticBusiness Dialogue, an organization of chief executive officers from Americanand European businesses working together with government leaders tostrengthen transatlantic economic relations. Ms. Hauser manages TABD’s pol-icy development agenda and serves as liaison with the U.S. Government, theEuropean Commission and Member States. She organized the meeting betweenTABD CEOs and President Bush, Chancellor Merkel and President Barroso atthe conclusion of the 2007 US-EU Summit and secured the TABD’s positionas the pre-eminent business organization providing advice to the U.S.Government and E.U. Commission on transatlantic economic issues.

Prior to assuming her current position in February 2005, Ms. Hauser wasAssociate Vice President for International Regulatory Affairs for thePharmaceutical Research and Manufacturers of America. She was responsible

for developing and executing strategies to achieve regulatory reform and addressburdensome regulations in foreign markets.

From 1998 to 2003, Ms. Hauser was Senior Vice President of theInformation Technology Industry Council, which represents the major infor-mation technology companies. She represented the association's global tech-nology and trade agenda before Congress, the Executive Branch and interna-tional organizations. She also served as the association’s Secretary and Treasurerand had overall responsibility for the $5 million annual budget, membership,and daily operations of the 27 member staff.

From 1994 to 1998, Ms. Hauser was co-founder and partner in two succes-sive financial advisory and investment firms, East Wind Partners andMillennium Capital Development. She provided strategic, communicationsand business planning advice for startup ventures focused on infrastructureprojects in emerging markets. Ms. Hauser was the Executive Director ofInternational Affairs for Bell Atlantic Corporation (now known as Verizon)between 1987 and 1993. She launched the corporation’s international govern-ment affairs function, opened the company's office in Brussels, served as ViceChair of the Telecommunications Task Force of the U.S. Chamber ofCommerce, and played a principal role on numerous bids and acquisitions.

Ms. Hauser served in the Office of the U.S. Trade Representation between1979 and 1987. Her final post was Deputy Assistant USTR for MultilateralNegotiations, where she was responsible for US preparations for the UruguayRound of multilateral trade negotiations. She also was assigned to the SenateFinance Committee Trade Subcommittee to help prepare the implementing legis-lation, the Trade Act of 1988, and manage outreach to the business community.

Ms. Hauser holds a Bachelor of Arts degree from the University of SouthernCalifornia and a Master’s degree from Columbia University.

CHRISTOPHER HILL is Professor of Public Policy and Technology and theGeorge Mason School of Public Policy. His primary interests are in the history,design, evaluation, and politics of federal policies and programs intended tostimulate technological innovation in the commercial marketplace. After earlyeducation and experience in engineering in industry and at WashingtonUniversity in St. Louis, he has devoted more than three decades of his profes-sional career to science and technology policy.

From 1997 to 2005, he served as Vice Provost for Research at GeorgeMason. He has held senior positions at the RAND Corporation, the NationalAcademies, the Congressional Research Service, MIT and the Office ofTechnology Assessment.

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Professor Hill’s extensive consulting includes work over the last decade withJapanese government agencies regarding reform of Japan’s national R&D, high-er education, and human resource development systems. He is a co-editor andcontributor to Technological Innovation for a Dynamic Economy and is current-ly writing a book with the working title, All Proper Means: Foundations of U.S.Technology Policy.

Professor Hill received his Ph.D. and M.S. in Chemical Engineering at theUniversity of Wisconsin, Madison and his B.S. in Chemical Engineering at theIllinois Institute of Technology.

GARY HUFBAUER is the Reginald Jones Senior Fellow at the Peter G.Peterson Institute for International Economics. He was formerly the MarcusWallenberg Professor of International Finance Diplomacy at GeorgetownUniversity (1985–92), senior fellow at the Institute (1981–85), deputy directorof the International Law Institute at Georgetown University (1979–81); deputyassistant secretary for international trade and investment policy of the U.S.Treasury (1977–79); and director of the international tax staff at the Treasury(1974–76). He has written extensively on international trade, investment, andtax issues.

Dr. Hufbauer is coauthor of US-China Trade Disputes: Rising Tide, RisingStakes (2006), The Shape of a Swiss-US Free Trade Agreement (2006), NAFTARevisited: Achievements and Challenges (2005), Reforming the US Corporate Tax(2005), Awakening Monster: The Alien Tort Statute of 1789 (2003), The Benefits ofPrice Covergence (2002) and World Capital Markets (2001), and coeditor of TheEx-Im Bank in the 21st Century (2001), Unfinished Business: Telecommunicationsafter the Uruguay Round (1997) and Flying High: Liberalizing Civil Aviation in theAsia Pacific (1996). He is author of Fundamental Tax Reform and Border TaxAdjustments (1996) and US Taxation of International Income (1992), and coauthorof Western Hemisphere Economic Integration (1994), Measuring the Costs ofProtection in the United States (1994), NAFTA: An Assessment (rev. 1993), NorthAmerican Free Trade (1992), Economic Sanctions Reconsidered (2d ed. 1990), TradePolicy for Troubled Industries (1986), and Subsidies in International Trade (1984).

KENT HUGHES is the Director of the Program on Science, Technology,America and the Global Economy (STAGE) at the Woodrow WilsonInternational Center for Scholars. Prior to joining the Center, Dr. Hughesserved as the Associate Deputy Secretary at the U.S. Department of Commerce.At Commerce, he worked to define and implement a long-term competitive-ness strategy emphasizing the close links among trade, technology and training.

Before joining the Clinton Administration, Dr. Hughes served as Presidentof the Council on Competitiveness, an action-oriented leadership organizationcomposed of chief executives from America’s business, labor and academic com-munities. Under Dr. Hughes’ leadership, the Council took the lead in puttingtechnology policy on the national agenda.

Previously, Dr. Hughes held a number of senior positions with the U.S.Congress, where he focused on international economic issues and the questionof long-term American economic strength. Among other positions, Dr. Hugheshas served as Chief Economist to U.S. Senate Majority Leader Robert Byrd,Senior Economist of the Congressional Joint Economic Committee andLegislative and Policy Director in the office of U.S. Senator Gary Hart duringthe Senator’s first presidential campaign. Prior to his congressional service, Dr.Hughes served as a staff attorney for the Urban Law Institute, a poverty lawfirm established to provide counsel to national and local groups. He was also anInternational Legal Center Fellow and Latin American Teaching Fellow inBrazil where he worked on a reform of Brazilian legal education.

Dr. Hughes holds a Ph.D. in economics from Washington University, aLL.B. from Harvard Law School and a B.A in Political and EconomicInstitutions from Yale University. Dr. Hughes has written several articles andbooks, including: “View from Brazil: Ending Their Dependence on ForeignOil,” TransAtlantic (May/June 2006), “A View from America: Demography andDeficits: Cowboys and Pioneers,” TransAtlantic (September/October 2005),“Facing the Global Competitiveness Challenge,” Issues in Science and Technology(Summer 2005), Building the Next American Century: The Past and Future ofEconomic Competitiveness (Woodrow Wilson Center Press, 2005) and Trade,Taxes, and Transnationals: International Economic Decision Making in Congress(Praeger 1979).

MARK LEHRER is an Associate Professor of Management at the SawyerBusiness School at Suffolk University. His research and expertise are in inter-national business and comparative management systems, R&D and innovation,knowledge management, and strategic management. He is a regular visitingscholar at the Kiel Institute of World Economics in Germany and was a VisitingProfessor at the Vienna University of Economics and Business Administrationin 2005–6.

Professor Lehrer’s publications include: “Organizing Knowledge SpilloversWhen Basic and Applied Research are Interdependent: German BiotechnologyPolicy in Historical Perspective,” (Journal of Technology Transfer), “Science-Driven vs. Market-Pioneering High Tech: Comparative German Technology

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Sectors in the Late 19th and Late 20th Century,” (Industrial and CorporateChange), “Pushing Scientists into the Marketplace: Promoting ScienceEntrepreneurship,” with K. Asakawa, (California Management Journal), and“Managing Local Knowledge Assets Globally: The Role of Regional InnovationRelays,” with K. Asakawa (Journal of World Business).

Professor Lehrer received a Ph.D. in Management from INSEAD(Fontainebleau, France) and another Ph.D. in German at the University ofCalifornia at Berkeley. He received his B.S. in Economics from MIT.

THOMAS PALLEY was formerly the Chief Economist with the U.S. –China Economic and Security Review Commission. Prior to joining theCommission he was Director of the Open Society Institute’s GlobalizationReform Project, and before that he was Assistant Director of Public Policy atthe AFL-CIO.

Dr. Palley has recently started a project, Economics for Democratic & OpenSocieties. The goal of the project is to stimulate public discussion about whatkinds of economic arrangements and conditions are needed to promote democ-racy and open society.

Dr. Palley is the author of Plenty of Nothing: The Downsizing of the AmericanDream and the Case for Structural Keynesianism (Princeton University Press) andPost Keynesian Economics (Macmillan Press). He has also published articles innumerous academic journals, and written for The Atlantic Monthly, AmericanProspect and Nation magazines, including: “External Contradictions of theChinese Development Model,” (Journal of Contemporary China, February2006); “The Questionable Legacy of Alan Greenspan,” (Challenge, November-December 2005); “The Economic Case for International Labor Standards,”(Cambridge Journal of Economics, January 2004); and “Asset Price Bubbles andthe Case for Asset-Based Reserve Requirements” (Challenge, 2003).

Dr. Palley holds a B.A. degree from Oxford University, and a M.A. degreein International Relations and Ph.D. in Economics, both from Yale University.

STEVEN PEARLSTE IN writes about business and the economy for TheWashington Post. His journalism career includes editing roles at The WashingtonPost and Inc. magazine. Mr. Pearlstein was founding publisher and editor of TheBoston Observer, a monthly journal of liberal opinion. He got his start in jour-nalism reporting for two New Hampshire newspapers—the Concord Monitorand the Foster’s Daily Democrat. Mr. Pearlstein has also worked as a televisionnews reporter and a congressional staffer.

PETER PETERSON is senior chairman and co-founder of The BlackstoneGroup. He is founding chairman of the Institute for International Economics,chairman of the Council on Foreign Relations, and founding president of TheConcord Coalition. Mr. Peterson was the co-chair of The Conference BoardCommission on Public Trust and Private Enterprises (co-chaired by John Snow,former secretary of the treasury). He was also chairman of the Federal ReserveBank of New York from (2000–04), chairman and CEO of Lehman Brothers(1973–77), later chairman and CEO of Lehman Brothers, Kuhn, Loeb Inc.(1977–84), and chairman and CEO of Bell and Howell Corporation (1963–71).

In 1971 President Richard Nixon named Mr. Peterson assistant to the presidentfor international economic affairs. He was named secretary of commerce in 1972and assumed the chairmanship of the National Commission on Productivity andwas appointed U.S. chairman of the US-Soviet Commercial Commission. Mr.Peterson was chairman of the U.S. Council of the International Chamber ofCommerce in 1978–79. President Ford appointed him chairman of theQuadrennial Commission on Executive, Legislative, and Judicial Salaries in 1976,and in 1994 President Clinton named him as a member of the BipartisanCommission on Entitlement and Tax Reform.

Mr. Peterson is the author of several books, including Running on Empty:How the Democratic and Republican Parties Are Bankrupting Our Future andWhat Americans Can Do About It; Gray Dawn: How the Coming Age Wave WillTransform America—and the World; Will America Grow Up Before It Grows Old?;and Facing Up: How to Rescue the Economy from Crushing Debt and Restore theAmerican Dream.

LEE PRICE Lee Price came to EPI after 18 years in government and eight yearsat the International Union, UAW. During six years at the CommerceDepartment, he served as Chief Economist and Deputy Under Secretary forEconomic Affairs. He also spent 12 years on the staff of four Congressional com-mittees: Joint Economic, Senate Budget, Senate Democratic Policy, and HouseBanking. At the UAW he primarily handled international economic issues.

Mr. Lee has a B.A. in economics from Stanford University and a M.A. andJ.D. from the University of Michigan.

BRYAN RITCHIE is an Associate Professor of International Relations atJames Madison College at Michigan State University. His research and teachingfocus on the political economy of development, especially for Southeast Asia.His particular areas of expertise include innovation, technological development,skills education and training, and social capital.

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Professor Ritchie’s research has been published by the OECD and journalssuch as International Organization, World Development, and Journal of EastAsian Studies. He has received several awards and grants, including MichiganState’s Teacher-Scholar award, the Council of Graduate School’s DistinguishedDissertation in the Social Sciences award for 2002, and grants from the U.S.Department of Education and the Andrew W. Mellon Foundation.

Professor Ritchie received his Ph.D. in Political Science from EmoryUniversity and an MBA from Brigham Young University. He has had extensiveexperience in the computer industry, including management and consultingroles for firms such as Novell, Iomega, 3Com, USRobotics, and Megahertz.

BRUCE STOKES is the international economics columnist for the NationalJournal, a Washington-based public policy magazine and a journalism fellow atthe German Marshall Fund. In addition, Mr. Stokes is a fellow with the PewResearch Center, where he works on the Global Attitudes Project, a survey of48,000 people in 50 countries on changing public values and attitudes towarda range of issues, including globalization, modernization, democratization andcurrent foreign policy concerns, including America’s role in the world. Mr.Stokes is a regular commentator for Marketplace on National Public Radio. Heis the U.S. rapporteur for the Transatlantic Policy Network and from 1996 to2002, he was a Senior Fellow at the Council on Foreign Relations.

T. N. SRINIVASAN is Samuel C. Park, Jr. Professor of Economics at YaleUniversity. Formerly a professor, and later research professor, at the IndianStatistical Institute, Delhi (1964–1977), he has taught at numerous universitiesin the U.S. His research interests include international trade, development,agricultural economics and microeconomic theory.

Professor Srinivasan recently authored Federalism and Economic Reform:International Perspectives, with Jessica Seddon Wallack, (Cambridge UniversityPress, 2006) as well as Reintegrating India with the World Economy with SureshD. Tendulkar (Institute for International Economics, 2003) and edited the vol-ume Frontiers in Applied General Equilibrium Modeling: Essays in Honor ofHerbert Scarf (Cambridge University Press, 2005) with Timothy J. Kehoe andJohn Whalley, and Trade, Finance and Investment in South Asia (Social SciencePress, 2001). He is also the author of Developing Countries and the MultilateralTrading System (Westview Press, 1998).

Professor Srinivasan is a Fellow of the American Philosophical Society, theEconometric Society and the American Academy of Arts and Sciences, and aForeign Associate of the National Academy of Sciences. He was namedDistinguished Fellow of the American Economic Association in 2003.

MARK T I LTON is Associate Professor of Political Science at PurdueUniversity. His research is in the field of comparative political economy, with aspecialization in Japan. He has been very interested in Japan’s transition to a moreopen market economy and its significance for Japan’s international trade, espe-cially with developing countries. The focus of his research has been on antitrustpolicy, using case studies in steel, telecommunications, and other industries.Much of Professor Tilton’s work compares Japan with Germany and the UnitedStates. His teaching also covers comparative politics and East Asian politics. Hispublications include Is Japan Really Changing Its Ways? Regulatory Reform and theJapanese Economy and Restrained Trade: Cartels in Japan’s Basic Materials Industries.

Professor Tilton has been a Visiting Scholar at the University of Tokyo, FreeUniversity of Berlin, Hamburg University, and Tsukuba University, amongother institutions. He was also a Luce Fellow at the Woodrow WilsonInternational Center for Scholars and the Sigur Center at George WashingtonUniversity. Professor Tilton received his Ph.D., M.A., and B.A., all in politicalscience, from the University of California at Berkeley.

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New Thinking inInternational Trade:National Strategies to BuildComparative Advantage

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the Global Economy

Science, Technology, America, and the Global EconomyWoodrow Wilson International Center for ScholarsOne Woodrow Wilson Plaza1300 Pennsylvania Avenue, NWWashington, DC 20004-3027T 202.691.4000F [email protected]

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Program on Science,Technology,America, and the Global Economy

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Program on Science,Technology, America,and the Global Economy